This book helped me come to grips with the insecurities I have as an investor. The truth is, no one really knows what they are doing and behavior is a much more important factor than skill in the world of investing.
We are emotional creatures. No matter what we do, we will always make choices based on how we feel. Investing is no different. So, understanding how we feel about a situation is the first step in truly becoming a master of our own financial fate.
It was a great book. I read it in 3 days. I loved it.
Who Should Read This Book?
This book should appeal to everyone, but more than likely it will mostly appeal to young people who are looking to find ways to navigate the new economy we are in.
Breakdown By Chapters
One of the benefits of this book is that the author went to great lengths to break down the chapters into short and punchy lessons. Each chapter goes through one of the psychological factors that play a role in decision making.
It is an easy read and it is outlined in such a way to makes it easy to generalize.
Below is a breakdown of the chapters.
No One Is Crazy
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.
People make money decisions based on their experience. What seems crazy to you is logical to another person.
Luck and Risk
Nothing is as good or as bad as it seems.
People make generalizations based on specific case studies. But luck and risk greatly offset specifics.
Mediate luck and risk by investing in principles, and not in trends.
Avoid anything that can lead to ruin.
Never Enough
Social comparison is baked into our lizard brains. However, this same comparison is why people never walk out of the casino with their winnings.
The trick to success is to get the goalpost to stop moving.
You’re always simultaneously ahead and behind others.
Confounding Compounding
Almost all gains in investing are accrued through compounding. The hard is to leave your money alone long enough for compounding to work it’s magic.
Our minds are not optimized to grasp long term returns.
Lesson: Let your money work.
Getting Wealthy vs. Staying Wealthy
These are two different skillsets that require different thinking and decision making.
Staying wealthy requires some combination of frugality and paranoia.
Tails, You Win
You can be wrong half the time and still make a fortune.
The Pareto Principle (80/20 rule) plays a big role in wealth building. Most of your gains will be generated by a few of your investments.
The long tails have tremendous influence.
Freedom
Money doesn’t buy happiness. Money buys the utility of time and utility of time is a much bigger factor on our happiness.
Lesson: Understand that the reason you are investing is to buy freedom of your time. That is the true currency that matters.
Man in the Car Paradox
No one is as impressed with your fancy car as you are. We buy things to increase our status, but our status is generated in our own minds.
The status game is zero sum and ultimately meaningless.
Your true status is determined by your impact.
Wealth is What You Don’t See
We buy status symbols to “feel” rich. Ironically, feeling rich is what deters us from becoming wealthy.
True wealth means being able to do what you what, when you want, how you want it.
Save Money
You don’t need a reason to save money. The chances of a big, unexpected expense popping up in your life are almost 100%.
Don’t spend money to show you have money.
Savings = Income – Ego
Reasonable > Rational
(This was my favorite lesson)
Investing is an emotional process. It’s not possible to always make the “rational” choice.
It’s better to be consistently reasonable.
Example: It’s reasonable to buy a new suit that you love.
Surprise!
We use the past as a guideline for the future. However, things that have never happened before happen all the time.
History is mostly a study of surprising events.
Lesson: You have no idea what is going to happen. Expect surprises.
Room for Error
The most important aspect of your financial plan is to assume that it will not go according to plan.
Invest with a margin for error, also called a margin of safety.
Lesson: It’s better to have it and not need it than need it and not have it.
You’ll Change
Your goals and ambitions will change. It’s okay to change your mind and to change your goals in accordance to your change in perspective.
The things that matter to you now may not matter as much in the future.
A good nights sleep is the benchmark.
Nothing is Free
People make bad decisions in investing when they start losing money. But the cost of playing the game is the fee you pay in market fluctuations.
Think of losses as a fee required to play the game. These losses are inevitable. They are the cost of entry.
You and Me
Everyone is playing a different game. Bubbles are the cause of some people playing short games and others playing long games.
Don’t take financial cues from people playing a different game than you.
Keep your eye on the prize of the game you are playing
The Seduction of Pessimism
Things take time to improve and can collapse in an instant.
This is why pessimism is more common in our language and our media.
Lesson: Don’t make choices based on pessimistic voices.
Pay attention to the macro trends and the big picture
When You’ll Believe Anything
Storytelling is literally baked into our DNA. We make choices because of the stories they tell. (Bitcoin).
Embrace the mess. Embrace the uncertainty and let your internal narration be the guiding light of your behavior.
Notable Quotes and Captions from the Book That Stood Out to Me
- The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people.
- A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.
- financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.
- Financial Engineering was the most popular major in Princeton’s School of Engineering a decade ago. Is there any evidence it has made us better investors? I have seen none.
- Physics isn’t controversial. It’s guided by laws. Finance is different. It’s guided by people’s behaviors. And how I behave might make sense to me but look crazy to you.
- I love Voltaire’s observation that “History never repeats itself; man always does.” It applies so well to how we behave with money.
- The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty.
- But every financial decision a person makes, makes sense to them in that moment and checks the boxes they need to check. They tell themselves a story about what they’re doing and why they’re doing it, and that story has been shaped by their own unique experiences.
- We all do crazy stuff with money, because we’re all relatively new to this game and what looks crazy to you might make sense to me. But no one is crazy—we all make decisions based on our own unique experiences that seem to make sense to us in a given moment.
- Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes.
- Some people are born into families that encourage education; others are against it. Some are born into flourishing economies encouraging of entrepreneurship; others are born into war and destitution. I want you to be successful, and I want you to earn it. But 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.
- You’ll get closer to actionable takeaways by looking for broad patterns of success and failure.
- 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 to stop moving.
- Modern capitalism is a pro at two things: generating wealth and generating envy. Perhaps they go hand in hand; wanting to surpass your peers can be the fuel of hard work. But life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations.
- Social comparison is the problem here.
- The point is that the ceiling of social comparison is so high that virtually no one will ever hit it. Which means it’s a battle that can never be won, or that the only way to win is to not fight to begin with—to accept that you might have enough, even if it’s less than those around you.
- “Enough” is not too little.
- “Enough” is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret.
- Reputation is invaluable. Freedom and independence are invaluable. Family and friends are invaluable. Being loved by those who you want to love you 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. Knowing when you have enough,
- 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 requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.
- More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.
- Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
- 3. A barbelled personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.
- Long tails—the farthest ends of a distribution of outcomes—have tremendous influence in finance, where a small number of events can account for the majority of outcomes.
- It is not intuitive that an investor can be wrong half the time and still make a fortune. It means we underestimate how normal it is for a lot of things to fail. Which causes us to overreact when they do.
- Or so you might think. Remember, tails drive everything. The distribution of success among large public stocks over time is not much different than it is in venture capital.
- Napoleon’s definition of a military genius was, “The man who can do the average thing when all those around him are going crazy.” It’s the same in investing.
- The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”
- Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of wellbeing than any of the objective conditions of life we have considered.
- Note: This quote is credited to a psychologist named Campbell.
- Note: This quote is credited to a psychologist named Campbell.
- Money has many ironies. Here’s an important one: Wealth is what you don’t see.
- Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.
- When most people say they want to be a millionaire, what they might actually mean is “I’d like to spend a million dollars.” And that is literally the opposite of being a millionaire.
- Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more.
- More importantly, the value of wealth is relative to what you need.
- Past a certain level of income, what you need is just what sits below your ego.
- People with enduring personal finance success—not necessarily those with high incomes—tend to have a propensity to not give a damn what others think about them.
- Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you.
- Intelligence is not a reliable advantage in a world that’s become as connected as ours has. But flexibility is.
- Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.
- The mental trick we play on ourselves here is an over-admiration of people who have been there, done that, when it comes to money.
- The correct lesson to learn from surprises is that the world is surprising. Not that we should 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.
- History is littered with good ideas taken too far, which are indistinguishable from bad ideas. The wisdom in having room for error is acknowledging that uncertainty, randomness, and chance—“unknowns”—are an ever-present part of life. The only way to deal with them is by increasing the gap between what you think will happen and what can happen while still leaving you capable of fighting another day.
- But people underestimate the need for room for error in almost everything they do that involves money. Stock analysts give their clients price targets, not price ranges. Economic forecasters predict things with precise figures; rarely broad probabilities. The pundit who speaks in unshakable certainties will gain a larger following than the one who says “We can’t know for sure,” and speaks in probabilities.
- “I have pledged—to you, the rating agencies and myself—to always run Berkshire with more than ample cash … When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.”
- Note: Warren buffet
- Note: Warren buffet
- Room for error does more than just widen the target around what you think might happen. It also helps protect you from things you’d never imagine, which can be the most troublesome events we face.
- Avoiding these kinds of unknown risks is, almost by definition, impossible. You can’t prepare for what you can’t envision. If there’s one way to guard against their damage, it’s avoiding single points of failure.
- Note: There are risks being talked about here are the unknowable risks. The “what the fuck?” moments you never saw coming and never could see coming.
- Note: There are risks being talked about here are the unknowable risks. The “what the fuck?” moments you never saw coming and never could see coming.
- A good rule of thumb for a lot of things in life is that everything that can break will eventually break. So if many things rely on one thing working, and that thing breaks, you are counting the days to catastrophe. That’s a single point of failure.
- Note: Great blog post
- Note: Great blog post
- The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.
- Gilbert’s research shows people from age 18 to 68 underestimate how much they will change in the future.
- We should avoid the extreme ends of financial planning. Assuming you’ll be happy with a very low income, or choosing to work endless hours in pursuit of a high one, increases the odds that you’ll one day find yourself at a point of regret.
- We should also come to accept the reality of changing our minds. Some of the most miserable workers I’ve met are people who stay loyal to a career only because it’s the field they picked when deciding on a college major at age 18. When you accept the End of History Illusion, you realize that the odds of picking a job when you’re not old enough to drink that you will still enjoy when you’re old enough to qualify for Social Security are low.
- The trick is to accept the reality of change and move on as soon as possible.
- Embracing the idea that financial goals made when you were a different person should be abandoned without mercy versus put on life support and dragged on can be a good strategy to minimize future regret.
- Note: This refers to the paragraph above, where the author is speaking of sunk costs.
- Note: This refers to the paragraph above, where the author is speaking of sunk costs.
- But the Money Gods do not look highly upon those who seek a reward without paying the price. Some car thieves will get away with it. Many more will be caught and punished.
- It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor.
- An iron rule of finance is that money chases returns to the greatest extent that it can.
- Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long term to mostly short term.
- It’s hard to justify paying $700,000 for a two-bedroom Florida tract home to raise your family in for the next 10 years. But it makes perfect sense if you plan on flipping the home in a few months into a market with rising prices to make a quick profit. Which is exactly what many people were doing during the bubble.
- The main thing I can recommend is going out of your way to identify what game you’re playing. It’s surprising how few of us do. We call everyone investing money “investors” like they’re basketball players, all playing the same game with the same rules.
- 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.
- Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.
- The short sting of pessimism prevails while the powerful pull of optimism goes unnoticed.
- At the personal level, there are two things to keep in mind about a story-driven world when managing your money.
- 1. The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.
- 2. Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.
- Just like my daughter, 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.
- Coming to terms with how much you don’t know means coming to terms with how much of what happens in the world is out of your control. And that can be hard to accept.
- Independence, at any income level, is driven by your savings rate.
- But everything I’ve learned about personal finance tells me that everyone—without exception—will eventually face a huge expense they did not expect—and they don’t plan for these expenses specifically because they did not expect them.
- Every investor should pick a strategy that has the highest odds of successfully meeting their goals. And I think for most investors, dollar-cost averaging into a low-cost index fund will provide the highest odds of long-term success.