The Psychology of Money (9/10)

Holy cow was this eye opening. Not only in regards to money, but the principles apply to many aspects of life. Strong story telling, clear and concise. Worth reading multiple times.

Summary and Highlights

You don’t have to be a genius to do well with money. You just need to have the proper set of emotional and behavioral skills. These skills have nothing to do with having a finance degree.

You must factor in luck when making financial decisions.

What seems like a dumb financial decision to one person, may be smart from someone else’s point of view. Depending on their life outlook, their mental model of the world, goals, and current circumstances.

The world is too complex for an individual to dictate 100% of their outcomes. Remember luck and risk when judging others (or your own) financial success.

People can get lucky when they just as well could have gotten unlucky. Even if it was the same decision. The outcome could have swayed either way.

Based on this, careful when judging or looking up to people. Not all successful people got there because of hard work, and not all poverty is due to lazyness.

Extreme cases of luck and risk cannot be applied to other people. The farther the extreme, the more likely the outcome was driven by luck and risk. So focus more on broad patterns, rather than on individuals or case studies. Common patterns are more likely to be applicable to your life.

When things are good or bad, realize that luck or risk played a huge part in bringing you there. Both factors can turn your life around just as quick.

Play in a way that lets you no get wiped out from bad luck so you can keep playing until the odds fall in your favor.

Recognize bad luck when judging yourself for failures.

Get the goalpost to stop moving

Do not risk what you have and need for what you don’t have and don’t need.

Accept that you might have enough. Even if it’s less than those around you.

Things not worth risking:

• Family and friends
• reputation
• Freedom and Independence
• Being loved be people you want to love you.
• Happiness

Compounding

You don’t need tremendous force to gain big results over time.

Small efforts over long amounts of time give compounding it’s power.

Time is the secret sauce.

High returns are often one off cases of luck that can’t be repeated.

Focus on earning pretty good returns that you can stick with for a long period of time.

Survival

Getting money requires taking risks, being optimistic, and putting yourself out there.

Keeping money requires humility, frugality, and fear that what you have can be taken away quickly.

Past success is somewhat attributable to luck. So it can’t be relied on indefinitely.

Survival should be the conerstone of your strategy.

Lonegevity is what makes the best strategy, compunding, work wonders.

Plan on you plan not going according to plan. Don’t rely on a single outcome.

Know that the path WILL be filled with ups and downs.

Tails Events

A small number of events drives the majority of outcomes.

Do not over react when things fail.

Things failing more often than they succeed is normal.

What you do today or tomorrow has less impact than what you do when the 1% amount of time when everyone else is going crazy.

The masters were wrong just as often as you were. They were just really right when they ended up being right.

You can be wrong more than half the time and still make a fortune.

Freedom is time

Highest form of weath is being able to choose what you do with your day.

Value friendship, being a part of something bigger than yourself, spending quality, unstructured time with your children.

Your kids want you more than they want things.

People imagine themselves driving the nice car

They do not think about the driver.

Wealth signaling does not get you admired.

Respect and admiration is earned through humility, kindness, and empathy. Not fancy stuff.

Spending money is the fastest way to having no money.

Wealth is what you don’t see.

If you spend money on things then you will end up with things and not money.

Rich is current income. Wealth is money not spent. Wealth is opportunity to do whatever you want.

It’s hard to find wealth role models because the definition of success in wealth is hidden.

Saving money

Wealth has little to do with returns or income and much to do with your savings rate.

Learning to be happy with less creates the gap between what you have and what you want.

A powerful way to increase your savings is to increase your humility.

Don’t give a damn about what others think of you.

Save for no reason

Life will throw curve balls at you.

Having extra money will give you more options to wait for the right opportunity. It lets you have time to think and to change course on your own terms.

Soft skills - like communication, empathy, and flexibility, will give you an advantage in a world where Intelligence is hyper competitive.

Reasonable can be better than rational

Reasonable helps you stick to it over the long haul. Which is what matters most when managing money.

Being able to sleep at night is more important than math.

It’s easier to justify “minimizing future regret” in real life than it is on paper.

“Love your investments”

Doing what you love provides the endurance to succeed. Rational thinking does not tie in your emotions to your results. Making it more likely that you will jump ship when the waters are rough.

“Things that have never happened before happen all the time”

History is not a map of the future.

The majority of historical outcomes are driven by events that were impossible to predict.

You can learn general takeaways from history, but stay away from things that are too specific.

Plan on your plan not going according to plan

Recognize that uncertanty and randomness are a part of life. Render the forcast unnecessary.

Have a margin of safety. Plan so that you can endure a range of outcomes. So that you can survive long enough to let the odds fall in your favor.

Assume your future returns will be slightly lower than historical average.

Do not risk anything you are unwilling to lose.

Barbell your money. Be paranoid with some, but unwilling to risk the other portion.

Try to avoid single points of failurre. You can’t plan for the things that are too crazy to cross your mind.

Relying on a paycheck with no savings is a single point of failure.

You will change

Imagining goals is easy and fun. But the reality of hitting that goal may be not as good as you imagined.

People are aware of how much they have changed in the past, but underestimate how much they will change in the future.

Avoid extreme ends of financial planning. Balance at every point becomes important to minimize future regret and keep you in the game for the long haul.

Accept the reality that you might change your mind. Move on as soon as possible.

Have no sunk costs. They make you a prisoner of your past self.

Abandon past goals without mercy. If they do not best suit your needs. The quicker it’s done, the sooner you can go back to compounding.

Nothing is free.

We often don’t stick to things because we were unable to identify the price to succeed.

The price of successful investing is voliility, fear, doubt, uncertantly, and regret. Be willing to pay it.

This is a fee for getting where we want to go. Not a fine for doing something wrong.

Beware of taking financial cues from people playing a different game than you are.

Investors have different goals and time horizons. Factors that an investor pays attention to make different prices worth it or not worth it. Depending on those goals.

We can see how much others spend on assets. But we do not see their goals, worries, and aspirations.

You must understand your own time horizon and act on those. Rather than acting on the decisions of people playing a different game than you.

The seduction of pessimism

Optimism sounds like a sales pitch, pessimism sounds like someone is trying to help you.

Optimism recognises a possitive outcome even with setbacks along the way.

Progress happens too slowly to notice. But setbacks happen too quickly to ignore.

Growth is driven by compoundings. Setbacks are driven by single points of failure or loss of confidence. Both of which can happen in an instant.

Stories are more powerful than statistics.

The more you want something to be true, the higher chance you are to believe a story that over estimates the likelyhood of that thing to be true.

The biggest risk is that the likelyhood of what you want to be trues isn’t even close to reality.

We are overconfident in our beliefs because we fill in what we don’t know to make a mental model of the world. Relying on skill more than on unknowns.

Key Takeaways

Find humility when things go right. Find compassion and forgiveness when things go wrong.

Less ego more wealth.

Manage your money in a way that helps you sleep at night.

Increasing your time horizon is the key to being a better investor.

Be okay with things going wrong. You can be wrong more than half the time and still make a fortune.

Use money to gain control of your time.

Be nicer and less flashy.

Save. For no reason.

Define the cost of success and be willing to pay it.

Worship room for error.

Avoid extreme ends of financial decisions.

You should like risk because it pays off over time.

Define the game you are playing.

Respect the mess.

How

Maintain a lifestyle below what you can afford. Avoid keeping up with the Joneses

We never want to be forced to sell the stocks we own.

Own low cost index funds. (Vanguard?)

Pick a strategy with the highest odds of success at reaching your financial goals.

• High savings rate
• patience
• optimism that the global economy will create value over the next several decades.

History

In the 1950’s, the country got rich by making the poor less poor. The gap widened starting in the 70’s

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