The Psychology of Money. Morgan Housel
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focus less on specific individuals and case studies and more on broad patterns.
Studying a specific person can be dangerous because we tend to study extreme examples—the billionaires, the CEOs, or the massive failures that dominate the news—and extreme examples are often the least applicable to other situations, given their complexity. The more extreme the outcome, the less likely you can apply its lessons to your own life, because the more likely the outcome was influenced by extreme ends of luck or risk.
You’ll get closer to actionable takeaways by looking for broad patterns of success and failure. The more common the pattern, the more applicable it might be to your life. Trying to emulate Warren Buffett’s investment success is hard, because his results are so extreme that the role of luck in his lifetime performance is very likely high, and luck isn’t something you can reliably emulate. But realizing, as we’ll see in chapter 7, that people who have control over their time tend to be happier in life is a broad and common enough observation that you can do something with it.
My favorite historian, Frederick Lewis Allen, spent his career depicting the life of the average, median American—how they lived, how they changed, what they did for work, what they ate for dinner, etc. There are more relevant lessons to take away from this kind of broad observation than there are in studying the extreme characters that tend to dominate the news.
Bill Gates once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”
When things are going extremely well, realize it’s not as good as you think. You are not invincible, and if you acknowledge that luck brought you success then you have to believe in luck’s cousin, risk, which can turn your story around just as quickly.
But the same is true in the other direction.
Failure can be a lousy teacher, because it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk. The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed financial goal there won’t wipe you out so you can keep playing until the odds fall in your favor.
But more important is that as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves and leave room for understanding when judging failures.
Nothing is as good or as bad as it seems.
Now let’s look at the stories of two men who pushed their luck.
John Bogle, the Vanguard founder who passed away in 2019, once told a story about money that highlights something we don’t think about enough:
At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, “Yes, but I have something he will never have … enough.”
Enough. I was stunned by the simple eloquence of that word—stunned for two reasons: first, because I have been given so much in my own life and, second, because Joseph Heller couldn’t have been more accurate.
For a critical element of our society, including many of the wealthiest and most powerful among us, there seems to be no limit today on what enough entails.
It’s so smart, and so powerful.
Let me offer two examples of the dangers of not having enough, and what they can teach us.
Rajat Gupta was born in Kolkata and orphaned as a teenager. People talk about the privileged few who begin life on third base. Gupta couldn’t even see the baseball stadium.
What he went on to achieve from those beginnings was simply phenomenal.
By his mid 40s Gupta was CEO of McKinsey, the world’s most prestigious consulting firm. He retired in 2007 to take on roles with the United Nations and the World Economic Forum. He partnered on philanthropic work with Bill Gates. He sat on the board of directors of five public companies. From the slums of Kolkata, Gupta had quite literally become one of the most successful businessmen alive.
With his success came enormous wealth. By 2008 Gupta was reportedly worth $100 million.11 It’s an unfathomable sum of money to most. A five percent annual return on that much money generates almost $600 an hour, 24 hours a day.
He could have done anything he wanted in life.
And what he wanted, by all accounts, wasn’t to be a mere centa-millionaire. Rajat Gupta wanted to be a billionaire. And he wanted it badly.
Gupta sat on the board of directors of Goldman Sachs, which surrounded him with some of the wealthiest investors in the world. One investor, citing the paydays of private equity tycoons, described Gupta like this: “I think he wants to be in that circle. That’s a billionaire circle, right? Goldman is like the hundreds of millions circle, right?”12
Right. So Gupta found a lucrative side hustle.
In 2008, as Goldman Sachs stared at the wrath of the financial crisis, Warren Buffett planned to invest $5 billion into the bank to help it survive. As a Goldman board member Gupta learned of this transaction before the public. It was valuable information. Goldman’s survival was in doubt and Buffett’s backing would surely send its stock soaring.
Sixteen seconds after learning of the pending deal Gupta, who was dialed into the Goldman board meeting, hung up the phone and called a hedge fund manager named Raj Rajaratnam. The call wasn’t recorded, but Rajaratnam immediately bought 175,000 shares of Goldman Sachs, so you can guess what was discussed. The Buffett-Goldman deal was announced to the public hours later. Goldman stock surged. Rajaratnam made a quick $1 million.
That was just one example of an alleged trend. The SEC claims Gupta’s insider tips led to $17 million in profits.
It was easy money. And, for prosecutors, it was an even easier case.
Gupta and Rajaratnam both went to prison for insider trading, their careers and reputations irrevocably ruined.
Now consider Bernie Madoff. His crime is well known. Madoff is the most notorious Ponzi schemer since Charles Ponzi himself. Madoff swindled investors for two decades before his crime was revealed—ironically just weeks after Gupta’s endeavor.
What’s overlooked is that Madoff, like Gupta, was more than a fraudster. Before the Ponzi scheme that made Madoff famous he was a wildly successful and legitimate businessman.
Madoff was a market maker, a job that matches buyers and sellers of stocks. He was very good at it. Here’s how The Wall Street Journal described Madoff’s market-making firm in 1992:
He has built a highly profitable securities firm, Bernard L. Madoff Investment Securities, which siphons a huge volume of stock trades away from the Big Board. The $740 million average daily volume of trades executed electronically by the Madoff firm off the exchange equals 9% of the New York exchange’s. Mr. Madoff’s firm can execute trades so quickly and cheaply that it actually pays other brokerage firms a penny a share to execute their customers’ orders, profiting from the spread between bid and ask prices that most stocks trade for.
This is not a journalist inaccurately describing a fraud yet to be uncovered; Madoff’s market-making business was legitimate. A former staffer said the market-making arm of Madoff’s business made between $25 million and $50 million per year.
Bernie Madoff’s legitimate, non-fraudulent business was by any measure a huge success. It made him hugely—and legitimately—wealthy.
And yet, the fraud.
The question we should ask of both Gupta and Madoff is why someone worth hundreds of millions of dollars would be so desperate for more money that they risked everything in pursuit of even more.
Crime committed by those living