The Psychology of Money

Housel compares financial compounding to the earth’s ice ages, noting that both start from small additions that quickly accumulate “to create tremendous results” (48). Earth’s ice ages were brought about by cool summers, which left ice packs unmelted, prompting more snow and ice to accumulate each year. Similarly, when people make long-term investments, they can benefit from the accumulated money these investments compound over many decades.

The author points to Warren Buffet as an example of the role of compounding in financial success. Housel emphasizes that while Buffet is a skilled investor, much of his fortune can be attributed to the fact that he started investing as a child and has lived a long life.

Housel argues that people focus too much on building wealth and ignore the issue of keeping it, which he says requires “some combination of frugality and paranoia” (54). Jesse Livermore, a stock market trader in 1920s New York, made billions shorting the market during the 1929 stock market crash. This success made him reckless and overconfident—he later became bankrupt due to stock losses and died by suicide. Housel argues that Livermore’s tragic financial failures and subsequent death serve as a warning about how easy it is to lose the money and security one has earned.