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Going Soft

Anika Hedstrom  |  December 10, 2020

MORGAN HOUSEL’S new book, The Psychology of Money, covers a host of topics related to money and emotion. I was especially drawn to his notion that “how you behave is more important than what you know.” I’ve been a student of behavioral finance for some time and know this to be true academically—but it also made me think of my father, Ole.

My father was born in 1948 into extreme poverty. His family of seven lived at times with no running water or electricity. They also shared an outhouse, which was not particularly warm in the cold Montana winters. My grandfather had dropped out of high school and worked on the railroad. My grandmother was a grocery store clerk.

Would you believe me if I told you that Ole grew up to be better at investing than 85% of active mutual fund managers? In other words, better than professionals with fancy educations and privileged upbringings?

That’s the funny thing about finance. It’s taught—and largely regarded—as a hard science, incorporating a plethora of complex formulas, concepts, jargon and rules. But if this were truly the ticket to financial success, why would individual investors like Ole, with no training, background or connections, outperform experts?

The answer: Because so much of financial success is actually related to behavior. That’s exactly the premise of Housel’s book. In it, he argues that financial success is less a hard science and more a soft skill. There were two soft skills that Ole possessed that set him up for financial freedom.

Wealth is what you don’t see. Ole was both a sports enthusiast and a total nerd. During the work week, his attire would mainly consist of Clarks dress shoes, Wrangler pants, a belt—which often missed at least one belt loop—and a collared shirt. He was the king of brown bag lunches and DIY. Ole’s fashion sense reflected his unassuming nature.

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Wealth accumulates by not spending money you could. This behavior shows up by practicing restraint and discipline, even as your income rises. It’s about forgoing upgrades and more stuff.  It’s choosing Wrangler and Clarks over more expensive brands at one level of income, and choosing two homes over four at another. It’s intentionally living a simpler life.

What you didn’t see about Ole was his savings, contributions to charity and freedom from debt. You also didn’t see an ego.

Victory lies in humility. As a tenured veterinary pathology professor, Ole earned a good living. Despite his academic and professional achievements, he never forgot his humble upbringing. He insisted that colleagues and students call him by his first name, forgoing the doctor and professor prefix.

By all accounts, he had already hit the lottery. He bootstrapped his way out of poverty and abuse into a stable, loving environment. He had a career he loved and daughters who looked up to him. He didn’t need or want to jeopardize what took so long to build. So he played the long game financially, beginning with what he knew best—research.

This took him to Jack Bogle, founder of Vanguard Group. Bogle was the pioneer of low-cost investing, benefiting the everyday investor by drastically reducing unnecessary fees and barriers. Ole dug into the costs associated with investing, and the research and evidence on which Vanguard was built. He was able to construct a portfolio with low-cost index funds. That not only earned him returns that outpaced the vast majority of active fund managers, but also gave him more time with his family and less time pretending to know more than he actually did. Simple, but not easy.

Ole was able to build financial security for his family through his prodigious savings rate and his investment humility. As Housel notes, when it comes to investing, perhaps the most important behavioral concept to understand is “that there is little correlation between investment effort and investment results.”

Anika Hedstrom, MBA, CFP, is a personal finance expert and advisor. Her previous articles include Make the ConnectionEffort Counts Twice and Stay in Your Lane. Anika writes on motivational and behavioral aspects of financial planning, and has been featured in USA Today, MarketWatch, Huffington Post, Business Insider and NPR. Always up for adventure, Anika can be found exploring new countries, whitewater rafting and chasing after her twins. Follow her on Twitter @AnikaHedstrom.

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PaulXIII
PaulXIII
4 months ago

I too am rereading Morgan Housel’s new book and fascinated by the threads he weaves into why success at personal finance is more soft skill and discipline.

Anika Hedstrom
Anika Hedstrom
4 months ago
Reply to  PaulXIII

He is one of my favorite writers.

davebarnes
davebarnes
4 months ago

Does it take a whole “book”? Couldn’t his ideas be condensed to a 5-page pamphlet?

David Powell
David Powell
3 months ago
Reply to  davebarnes

The journey is the reward, DB 😉

Thomas
Thomas
4 months ago
Reply to  davebarnes

Most ideas in personal finance can be expressed in a few sentences. But it takes more than a few sentences to really convey a concept, not just intellectually, but to the point where people’s behavior can be changed.

Anika Hedstrom
Anika Hedstrom
4 months ago
Reply to  davebarnes

Good question. What is unique about his book is that each chapter is very condensed, and could be read as a stand alone.

R Quinn
R Quinn
4 months ago

I love this phrase “ Wealth accumulates by not spending money you could.” How true and how much overlooked. There is so much talk of people living P to P, always assuming a shortage of income, but never mentioning the spending side of the equation.

Anika Hedstrom
Anika Hedstrom
4 months ago
Reply to  R Quinn

Thank you. I think it was particularly impactful for my father, as he came from nothing. Perhaps that is why he had a lot of natural discipline, because he was so used to going so long with very little, that it was much easier for him to discern what he really needed.

David Powell
David Powell
3 months ago
Reply to  R Quinn

That phrase caught my eye too for its succinct clarity. It’s the essence of the Millionaire Next Door, and brings together three of Jonathan’s “big ideas”: humility, simplicity, and future self. Lucky to have such a wise father, and thanks for another great post, Anika.

parkslope
parkslope
4 months ago

Those in the physical sciences consider any discipline that incorporates human behavior, no matter how quantitative, to be a soft science (see Hedges-How Hard is Hard Science, How Soft is Soft Science: https://users.cs.northwestern.edu/~paritosh/papers/others/HedgesHardSoftScience87.pdf) for a critique of this mindset.

Ole was clearly very intelligent and I no doubt that both his analytic research competence (what some might consider a “hard” skill) and frugal mindset were both important factors in his financial success.

Anika Hedstrom
Anika Hedstrom
4 months ago
Reply to  parkslope

Excellent points.

What’s perhaps a bit different about financial services than a physical science is just how young it is, and it wasn’t until the 70s when Tversky and Kahneman began to shape our understanding of human rationalities and decision making. Behavioral finance is still not widely adopted into practice, whereas investment management has largely been lead primarily by math. I think we all stand to benefit from both.

Thanks for making the time to read/comment and include a helpful link. Great dialogue.

Steven Pace
Steven Pace
3 months ago

“The stock market is a very expensive place to get to know yourself.” – Warren Buffett

Langston Holland
Langston Holland
3 months ago
Reply to  Steven Pace

Maybe you’re referring to Adam Smith’s iconic book The Money Game? If you don’t know who you are, the market is an expensive place to find out.

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