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.
Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.
Soft skills are more important than the technical side of money.
People do some crazy things with money. But 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.
Here's the thing: People are from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons.
Everyone has their own unique experience with how the world works. Someone grew in poverty, someone in inflation,
someone lost everything in the Great Depression. These all experiences create different emotions - fear, uncertainity, safety etc.
The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty.
We all think we know how the world works. But we’ve all only experienced a tiny sliver of it.
The economists did a study and wrote:
“Our findings suggest that individual investors’ willingness to bear risk depends on personal history.” Not intelligence, or education, or sophistication. Just the dumb luck of when and where you were born.
Few people make financial decisions purely with a spreadsheet. In reality, your own unique view of the world, ego, pride, marketing and odd incentives are scrambled together into a narrative that works for you.
Risk and luck are doppelgangers. Luck and risk are both the reality that every outcome in life is guided by forces other than individual efforts. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes. They are driven by the same thing: You are one person in a game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.
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. And therefore, Focus less on specific individuals and case studies and more on broad patterns.
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 won’t wipe you out so you can keep playing until the odds fall in your favor.
why someone worth hundreds of millions of dollars would be so desperate for more money that they risked everything in pursuit of even more?
There is no reason to risk what you have and need for what you don’t have and don’t need.
a. The hardest financial skill is getting the goalpost to stop moving.
This is because modern capitalism is a pro at two things: generating wealth and generating envy.
b. 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.
c. “Enough” is not too little.
“Enough” is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret.
d. There are many things never worth risking, no matter the potential gain.
Reputation, freedom and independence are invaluable. Family and friends are invaluable.
Being loved by those you want to love is invaluable. Happiness is invaluable.
96% of Warren Buffett's wealth came after his 65th birthday. Our minds are not built to handle such absurdities.
The counterintutive nature of compounding leads even the smartest of us to overlook its power. For example, In 2004 Bill Gates criticized the new Gmail, wondering why anyone would need a gigabyte of storage. The danger here is that when compounding isn't intutive we often ignore its potential and focus on solving problems through other means. Not because we are overthinking, but because we rarely stop to consider compounding potential.
Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild. The opposite of this—earning huge returns that can’t be held onto—leads to some tragic stories.
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.
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.”
You can be optimistic that the long-term growth trajectory is up and to the right, but equally sure that the road between now and
then is filled with landmines, and always will be. Those two things are not mutually exclusive.
A good plan doesn’t pretend this weren’t true; it embraces it and emphasizes room for error.
Remember, tails drive everything
Effectively all of the index's overall returns for the Russell 3000 Index came from 7% of component companies.
In 2018, Amazon alone drove 6% of the S&P 500's returns. And Amazon growth is almost entirely due to Prime and Amazon Web Services,
which itself are tail events in a company that has experimented with hundreds of products.
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.
In business, investing and finance, it's normal for lots of things to go wrong, break, fail and fall.
If you're a good investor most years will be just OK, and plenty will be bad. But few tail years will drive everything.
THE HIGHEST FORM of wealth is the ability to wake up every morning and say, “I can do whatever I want today
Money's greatest intrinsic value - is its ability to give you control over your time, a level of independence and autonomy. Ability to take few days off, to wait for a good job to come around after you get laid off, not being terrified of your boss, ability to take a job with lower pay but flexible hours, ability to deal with medical emergency without worrying, retiring when you want.
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.
In business, investing and finance, it's normal for lots of things to go wrong, break, fail and fall.
If you're a good investor most years will be just OK, and plenty will be bad. But few tail years will drive everything.
In his book 30 Lessons for Living, gerontologist Karl pillemer interviewed a thousand elderly Americans
looking for the most important lessons they learned from decades of life experience. He wrote:
No one—not a single person out of a thousand—said that to be happy you should try to work as hard as you can to make money to buy the things you want.
No one—not a single person—said it’s important to be at least as wealthy as the people around you, and if you have more than they do it’s real success.
No one—not a single person—said you should choose your work based on your desired future earning power.
You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does—especially from the people you want to respect and admire you.
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.
We tend to judge wealth by what we see, because that's the information we have in front of us. We can't see people's bank accounts or brokerage statements. We rely on outward appearances. Cars, Homes, Instagram photos.
But the truth is that wealth is what you don’t see. Wealth is the nice cars not purchased. Wealth is financial assets that haven't yet been converted into the stuff you see. Wealth is hidden. It's income not spent.
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.
The first idea—simple, but easy to overlook—is that building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
Past a certain level of income, what you need is just what sits below your ego.
One of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.
You don’t need a specific reason to save.
Saving does not require a goal of purchasing something specific. You can save just for saving’s sake.
And indeed you should. Everyone should.
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.
Academic finance is devoted to finding the mathematically optimal investment strategies. In the real world, people do not want the mathematically optimal strategy. They want the strategy that maximizes for how well they sleep at night.
History helps us calibrate our expectations, study where people tend to go wrong, and offers a rough guide of what tends to work. But it is not, in any way, a map of the future.
Two dangerous things happen when you rely too heavily on investment history as a guide to
what’s going to happen next.
The most important part of every plan is planning on your plan not going according to plan.
The wisdom in having room for error is acknowledging that uncertainty, randomness, and chance—“ unknowns”—are an ever-present part of life.
Room for error lets you endure a range of potential outcomes, and endurance lets you stick around long enough to let the odds of benefiting from low-probability outcome fall in your favor. Use room for error when estimating your future returns. For my own investments, I assume the future returns I’ll earn in my lifetime will be ⅓ lower than the historic average. So I save more than I would if I assumed the future will resemble the past. It’s my margin of safety.
An important cousin of room for error is optimism bias in risk-taking - An attachment to favorable odds when the downside is unacceptable in any circumstances. The idea is that you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking.
The End of History Illusion - Tendency for people to be keenly aware of how much they've changed in the past, but to underestimate how much their personalities, desires, and goals are likely to change in the future.
Long-term planning is harder than it seems because people's goals and desires change over time.
But there are two things to keep in mind when making what you think are long-term decisions -
Everything has a price, but not all prices appear on labels. Find the price, then pay it.
“Hold stocks for the long run,” you’ll hear. It’s good advice. But do you know how hard it is to maintain a long-term outlook when stocks are collapsing? Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret—all of which are easy to overlook until you’re dealing with them in real time.
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.