The Psychology of Money - Morgan Housel

 

The dilemma of luck versus talent

• Saving is income minus ego.

No one's crazy

• Two topics impact everyone, wether you are interested in them or not: health and money.
• Your personal experiences with money make up maybe 0.00000001% of what's happened in the world, but maybe 80% of how you think the world works.
• Some lessons have to be experienced before they can be understood.
• We all make decisions based on our unique experiences that seem to make sense to us in a given moment.

Luck and risk

• Nothing is as good or as bad as it seems.
• It's possible to statistically measure wether some decisions were wise. But in the real world, day to day, we simply don't. It's too hard. We prefer simple stories, which are easy but often devilishly misleading.
• We have brains that prefer easy answers without much appetite for nuance.
• The line between "inspiringly bold" and "foolishly reckless" can be a millimeter thick and only visible with hindsight.
• Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
• Realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.
• Therefore focus less on specific individuals and case studies and more on broad patterns.
• 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.
• Bill Gates: "Success is a lousy teacher. It seduces smart people into thinking they can't lose".
• 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 don't wipe you out so you can keep playing until the odds fall into your favor.

Never Enough

• Madoff was a market maker, a job that matches buyers and sellers of stocks.
• 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 customer's orders, profiting from the spread between bid and ask prices that most stocks trade for.
• There is no reason to risk what you have and need for what you don't have and don't need.
• The hardest financial skill is getting the goalpost (poteau de but) to stop moving.
• Happiness is just results minus expectations.
• Social comparison is the problem here.
• Accept that you might have enough, even if it is less than those around you.
• "Enough" is not too little.
• There are many things never worth risking, no matter the potential gain:
• Reputation is invaluable.
• Freedom and independence are invaluable.
• Family and friends are invaluable.
• Being loved by those you want to love is invaluable.
• Happiness is invaluable.
• and your best shot at keeping these things is knowing when it's time to stop taking risks that might harm them.

Confounding compounding

• Lessons from one field can often teach us something important about unrelated fields.
• The big takeaway from ice ages is that you don't need tremendous force to create tremendous results.
• More than 2000 books are dedicated to how Warren Buffet built his fortune. Many of them are wonderful. But few pay attention enough attention to the simplest fact: Buffet's fortune isn't due to just being a good investor, but being a good investor since he was literally a child. As I write Warren Buffet's net worth is $84.5 billion. Of that $84.2 billion was accumulated after his 50th birthday. $81.5 came after he qualified fo Social Security, in his mid-60s.
• His skill is investing, but his secret is time.
• You never get accustomed to how quickly things can grow.
• Shut up and wait.

Getting wealthy vs Staying wealthy

• Good investing is not necessarily about making good decisions. It's about consistently not screwing up.
• There are a million ways to get wealthy, and plenty of books on how to do so.
• But there's only one way to stay wealthy: some combination of frugality and paranoia.
• Getting money is one thing. Keeping it is another.
• Getting money and keeping money are two different skills.
• We assume that tomorrow won't be like yesterday. We can't afford to rest on our laurels. We can't be complacent. We can't assume that yesterday's success translates into tomorrow's good fortune.
• And longevity - investing consistently from age 10 to at least age 89 - is what made compounding work wonders.
• Nassim Taleb put it this way " Having an "edge" and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs".
• Planning is important, but the most important part of every plan is to plan on the plan not going according to the plan.
• Room for error - often call margin for safety - is one of the most under appreciated forces in finance. It comes in many forms: A frugal budget, flexible thinking, and a loose timeline - anything that lets you live happily with a range of outcomes.
• A barbelled personality - optimistic about the future, but paranoid about what will prevent you from getting to the future - is vital.

Tails, you win

• You can be wrong half the time and still make a fortune.
• The great investors bought vast quantities of art.
• The idea that a few things account for most results is not just true for companies in your investment portfolio. It's also an important part of your own behavior as an investor.
• Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spend on cruise control.
• A good definition of an investing genius is the man or woman who can do the average thing when all this around them are going crazy.
• "It's not wether you're right or wrong that's important", George Soros once said, "but how much money you make when you're righted you much you lose when you're wrong". You can be wrong half the time and still make a fortune.

Freedom

• Controlling your time is the highest dividend money pays.
• The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend pays.
• Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that makes people happy.
• People feel like they're in control - in the driver's seat. When we try to get them to do something, they feel disempowered. Rather than feeling like they made the choice, they feel like we made it for them. So they say no or do something else, even when they might have originally been happy to go along.
• When you accept how true that statement is, you realize that aligning money towards a life that lets you do what you want, when you want, with who you want, where you want, for as long as you want, has incredible return.
• More of us have jobs that look close to Rockefeller than a typical 1950s manufacturing worker, which means our days don't end when we clock out and leave the factory. We're constantly working in our heads, which means it feels like work never ends.
• Controlling your time is the highest dividend money pays.

Man in the car paradox

• No one is impressed with your possessions as much as you are.
• Humility, kindness, and empathy will bring you more respect than horsepower ever will.

Wealth is what you don't see

• Spending money to show people how much money you have is the fastest way to have less money.
• The truth is that wealth is what you don't see.
• The only way to be wealthy is to not spend the money that you don't have.
• But wealth is hidden. It's income not spent. Wealth is an option not yet taken to buy something later.

Save money

• Money relies more on psychology than finance.
• Having more control over your timed options is becoming one of the most valuable currencies in the world.

Reasonable rational

• A one-degree increase in body temperature has been shown to slow the replication rate of some virus by a factor of 200.
• It may be rational to want a fever if you have an infection. But it's not reasonable.
• Acting on investment forecasts is dangerous.

Surprise

• An overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress.
• The most important driver of anything tied to money is the stories people tell themselves and the preference they have for goods and services. Those things don't tend to sit still. They change with culture and generation. They're always changing and always will.
• Realizing that the future might not look anything like the past is a special kind of skill that is not generally looked highly upon by the financial forecasting community.
• But, in fact, what you should learn when you make a mistake because you did not anticipate something in that the world is difficult to anticipate. That's the correct lesson to learn from surprises: that the world is surprising.
• The correct lesson to learn from surprises is that the world is surprising. Not that the world use past surprises as a guide to future boundaries; that we should use past surprises as an admission that we have no idea what might happen next.
• There was no such thing as venture capital. An aspiring young entrepreneur had very few places to turn, and those places were all guarded by risk-averse gatekeepers with zero imagination. In other words, bankers.
• The Intelligent Investor is one of the greatest investing books of all time. But I don't know a single investor who has one well implementing Graham's published formulas. 
• General things like people's relationship to greed and fear, how they behave under stress, and how they respond to incentives tend to be stable in time.

Room for error

• You have to plan on your plan not going according to plan.
• We must make sure that we enough money to withstand any swings of bad luck.
• The purpose of the margin of safety is to render the forecast unnecessary.
• But people underestimate the need for room for error in almost everything they do that involves money.
• Can you survive your assets declining by 30%?
• The solution is simple: Use room for error when estimating your future returns.
• The ability to do what you want, when you want, for as long a you want, has an infinite ROI.
• You can plan for every risk except the things that are too crazy to cross your mind.
• It's fine to save for a car, or a home, or for retirement. But it's equally important to save things you can't possibly predict or even comprehend.
• I save a lot, and I have no idea what I'll use the savings for in the future.

You'll change

• Long-term planning is harder than it seems because people's goals and desires change over time.
• Yourself, don't know today what you will even want in the future.
• The trick is to accept the reality of change and move on as soon as possible.
• I have no sunk costs.
• Sunk costs - anchoring decisions to past efforts that can't be refunded - are a devil in a world where people change over time.

Nothing's free

• Every job looks easy when you're not the one doing it.

You and me

• Beware taking financial cues from people playing a different game than you are.
• Investors often innocently take cues from other investors who are playing a different game than they are.
• Momentum attracts short-term traders in a reasonable way.
• What do you expect people to do when momentum creates a big-short term return potential? Sit and watch patiently? Never. That's not how the world works. Profits will always be chased.
• I am a passive investor optimistic in the world's ability to generate real economic growth and I am confident that over the next 30 years that growth will accrue my investments.

The seduction of pessimism

• Pessimism just sounds smarter and more plausible than optimism.
• Tell someone that everything will be great and they're likely to either shrug you off or offer a skeptical eye. Tell someone they're in danger and you have their undivided attention.
• When directly compared or weighted against each other, losses loom larger than gains. This asymmetry between the power of positive and negative operations or experiences has an evolutionary history. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.
• Progress happens too slowly to notice, but setbacks happen too quickly to ignore.
• In investing you must identify the price of success - volatility and loss amid the long backdrop of growth - and be willing to pay it.

When you'll believe anything

• The more you want something to be true, the more likely you are to believe a story that overestimates the odds of being true.
• I don't know what I don't know. So I am just as susceptible to explaining the world through the limited set of mental models I have at my disposal.
• The outcome of a start-up depends as much on the achievements of its competitors and on changes in the market as on its own efforts.

All together now

• Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong.
• Less ego, more wealth.
• Manage your money in a way that helps you sleep at night.
• If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.
• Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune.
• It's fine to have a large chunk of poor investments and a few outstanding ones.
• Use money to gain control over your time.
• Be nicer and less flashy. No one is impressed with your possessions as much as you are.
• Savings for things that are impossible to predict or define is one of the best reasons to save.
• Avoid the extreme ends of financial decisions.
• You should like risk because it pays off over time.
• Define the game you're playing.

Confessions

• What works for one person may not work for another.
• You have to find what works for you.
• Independence, to me, doesn't mean you'll stop working. It means you only do the work you like with people you like at the times you want as long as you want.
• Most of what we get pleasure from, going for walks, reading, podcast, costs little, so we rarely feel like we're missing out.
• True success is exiting some rat race to modulate one's activities for peace of mind.
• Good decisions aren't always rational. At some point you have to choose between being happy or being "right".
• What are you saving for? A house? A boat? A new car? No, none of those.
• The first rule of compounding is to never interrupt it unnecessarily.
• The world is driven by tails, a few variables account for the majority of returns.
• My investing strategy doesn't rely on picking the right sector, or timing the next recession. It relies on a high savings rate, patience, and optimism that the global economy will create value over the next several decades.
• The more the Internet exposes people to new points of view, the angrier people get that different views exist.