My notes for the book "The Psychology of Money" by Morgan Housel.
This is mostly a thought dump after I read each chapter of the book.
Introduction
When talking about money one must consider psychology and history over numbers
Chapter 1: No One's Crazy
People who lived through war and famines, have different views about the world than the people who lived during peace and wealth.
A person's view about what assets are good or bad are usually formed during teens and stay like that in their adult life.
So, the situation that the world is in or rather the environment of the person affects their view of money.
Everyone has their own opinion's due to their own individual experience, so one can't just invalidate other's opinions while being in much better circumstances.
Chapter 2: Luck & Risk
Bill Gates had access to a computer since he was a kid through his school in Seattle. Probably the only school in the US to have a computer at that time (1968). Bill Gates one's said that if Lakeside (his school) didn't exist, then Microsoft wouldn't exist.
It was very unlikely (one in a million chance) for Bill Gates to be able to access the computer.
Paul Allen, Bill Gates' friend since childhood, is popular, but not as popular as Kent Evans. Kent Evans and Bill Gates were smart since school and could code at that age.
Kent Evans died in a mountaineering accident before he graduated high school. It's a one in a million chance of that roughly.
It's never as good or as bad as it seems.
"The exact role of luck in successful outcomes"
How much of a success or a failure can be attributed to luck? We can't know for sure what to follow, because we don't know whether a success we're trying to copy or a failure we're trying to avoid was a product of chance.
Did I make a mistake? or did I just experience the reality or risk?
Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
Focus less on specific individuals and case studies and more on broad patterns.
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.
"Success is a lousy teacher. It seduces people into thinking they can't lose." - Bill Gates
This chapter resonated with me, and this is something that I've explored before.
Chapter 3: Never Enough
We need to define what is 'Enough' for us, instead of always moving the goal post ahead. If nothing is enough, we won't always be that happy about achieving our goal.
Rajat Gupta - Became CEO of McKinsey, part of UN and WEF, and a lot of random stuff. He had a net worth of more than a hundred million dollars.
Rajat Gupta did insider trading. An unnecessary risk. Something that's probably fueled by mostly greed.
Bernie Madoff - The most notorious Ponzi schemer since Charles Ponzi himself. He was good at work, but still took a risk of Ponzi scheme.
Despite being super rich, these people still risked everything they had to get a little bit more.
>To make money they didn't have and didn't need, they risked what they did have and did need. And that's foolish. It is just plain foolish. If you risk something that is important to you for something that is unimportant to you, it just does not make any sense.
-- Warren Buffett
The hardest financial skill is getting the goalpost to stop moving.
Social comparison is the problem - people compare themselves to others in their field that are much more rich than they are at that point in their life.
"Enough" is not too little - We compare and think that what we have is low, or that settling for enough means we're settling for something low and ignoring potential opportunities. It is not true at all, if we're settling for enough that just means that we aren't taking unnecessary risks for something not essential.
There are many things never worth rising, no matter the potential gain.
Chapter 4: Confounding Compounding
$81.5 billion of Warren Buffett's $84.5 billion net worth came after his 65th birthday.
Warren Buffett is a phenomenal investor, but the most important thing that led to the amount of wealth he's at is compounding.
He started at a very young age and so his wealth compounded.
Others who started late with returns higher than Buffett still haven't caught up with him.
Some technology optimist in 1950s would have predicted that storage would be 100 times more, or 1000 times more, or 10,000 times more than it was at the time, but he wouldn't have predicted it to be "30 million times larger within my lifetime"
The effects of compounding seem non-intuitive to us - we're more comfortable with linearity.
Chapter 5: Getting Wealthy VS. Staying Wealthy
Good investing is not necessarily about making good decisions. It's about consistently not screwing up.
Don't get carried away by your profits. Keep your head.
I think the main point in this chapter is that people get in over their head after getting profits and then start increasing their risk.
Survival is the most important.
The ability to stick around for a long time and letting compounding work is what makes the biggest difference.
Few gains are so great that they're worth wiping yourself out over.
Buffett did a lot of things, but there are also lots of things that he didn't do:
He didn't get carried away with debt.
He didn't panic and sell during the 14 recessions he's lived through
He didn't sully his business reputation.
He didn't attach himself to one strategy, one world view, or one passing trend.
He didn't rely on others' money
He didn't burn himself out and quit or retire.
"Having and 'edge' and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs." - Nassim Taleb.
More than getting big returns, ensure that you are safe. You need to stick around long enough for compounding to work.
Good plans are what consider good margin of error in the face of unpredictability
Planning is important, but the most important part of every plan is to plan on the plan not going according to the plan.
You plan, God laughs.
Look back 20 years, we couldn't have predicted twenty years ago what could've happened.
A plan is only useful if it can survive reality.
A good plan embraces unpredictability and emphasizes room for error.
Many bets fail not because they were wrong, but because they were mostly right in a situation that required for things to be exactly right.
Be optimistic about the future and paranoid about what will prevent you from getting to the future - a barbelled personality.
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.
We need to consider that destruction and things going down are a part of life. We need to consider failure cases and move forward and make plans resulting in years of growth.
Cool chapter. Mostly about safety and considering failure as part of the plan.
Chapter 6: Tails, you win
This chapter was about how it's the unlikely events that account for most of the success.
An art collector from Germany invested in art and made millions after many many years. The art that was really expensive was just a very small percentage of the total he had.
Only a few small things account for a lot of profit many times.
Walt Disney made like 400 or more cartoons before his first hit Snow White, and made a lot of money and even won an Oscar.
Most of the startups fail, but some will return a huge profit.
Publicly traded companies fail too - for example a film studio - one that made Terminator 2, and Total recall - was super profitable during the 1980s and 90s but eventually it failed and went bankrupt.
We should accept that failure is a common event and successes are exceptions.
The potential rewards of success should not only outweigh the costs of failure but should far exceed them by a significant margin
The best investors or businessmen have a lot of failures, and few successes that made them the best.
Amazon CEO Jeff Bezos launched the Fire Phone and it was criticized as a failure. Bezos responded that this is nothing I have bigger failures I'm gonna launch soon.
Amazon Prime and AWS make up for whatever failures they produce. They are the tail things that make most of the profit for Amazon.
Netflix CEO asks the content creators to be more creative saying the cancel rate is very low - this shows awareness of the importance of tail events that drive succss.
I liked the chapter. It's kinda inspiring in the sense that we should take more risks - where the previous chapters were like take the least amount of risk. Perhaps risk is not the best word to use here. This chapter encouraged the reader to simply do more and learn from your failures and profit a lot from your successes.
Chapter 7: Freedom
Someone interviewed a thousand elderly Americans looking for the most important lessons
No one ever said that you should work hard to make a lot of money
No one said that you should be as wealthy as the people around you or more wealthy than people around you
No one said that you should choose your work based on your desired future earning power.
The time that we have for ourselves has decreased a lot even though our working hours may have increased since we have thoughts of work occupying our minds all the time
so true
In the current era, most of the jobs are something that requires thoughts sometimes thoughts + actions.
We are satisfied / happy in our life when we have control over our time.
We could be doing the work that we love, but it becomes less desirable if we're doing it for someone else.
We often define comfort around wealth like how much we can survive if we stop our salary from the job or face any kind of emergencies.
Controlling your time is the highest dividend that money pays.
Chapter 8: Man in the Car Paradox
No one is impressed with your possessions as much as you are.
Author used to imagine himself driving fancy cars that he saw people driving.
Often, people think that buying fancy cars will get them respect and admiration but in reality, it's the car that people admire and not the person sitting in it.
People tend to want wealth to signal to others that they should be liked or admired.
But people looking at your wealth bypass admiring you, not because they think that wealth isn't admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired.
This applies to everything - like jewelry, houses, etc whatever people use to flaunt their wealth.
Chapter 9: 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.
Often people spend way too much or even go into debt to show that they are rich.
Rich is what people see. You see the cars people buy. The big homes.
Wealth is hidden. You don't see what is not spent. You don't see people's portfolios. Bank account statements.
We only know things about them that we see so we can't assume that someone buying a Ferrari is automatically wealthy.
"Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?" - Rihanna's financial advisor after being sued by Rihanna.
Exercise is like being rich - You think I did the work and I now deserve to treat myself to a big meal.
Wealth is turning down that treat meal and actually burning net calories.
The world is filled with people who look modest but are actually wealthy and people who look rich who live at the razor's edge of insolvency.
Chapter 10: Save Money
The only factor you can control generates one of the only things that matters.
Building wealth has little do with your income or investment returns, and lots to do with your savings rate
The world was running out of oil in the 1970s, the reason it was overcome was because people started building more energy efficient machines.
The world grew it's "energy wealth" not by increasing the energy it had but by decreasing the energy it needed.
Finding energy is out of our control - it depends on many factors geology, geography, weather, etc. but how we use it is in our control.
Investment returns can make you rich, but whether an investment strategy will work and how long it will work etc is always in doubt. Your savings are in your control.
The value of wealth is relative to what you need
A person may be a great investor, but if their spending habits are worse than an average investor - the average one wins in the long term.
It is an opportunity for most people to improve their finances by just observing and cutting their spending.
Past a certain level of income, what you need is just what sits below your ego
People often spend money to show off.
People who with personal finance success - not necessarily those with high incomes - tend to have a propensity to not give a damn what others think about them.
People's ability to save is more in their control than they might think
Desire less = spend less
Care less about what others think of you = desire less
You don't need a specific reason to save
Saving can be done with a goal, but it should not require a goal.
Saving without a spending goal gives you options and flexibility.
Flexibility and control over your time is an unseen return on wealth
Savings give you a lot of flexibility which means you can take a break on your job, or wait for opportunities or whatever.
Basically, it's something whose worth cannot be measured since it opens up possibilities for you.
Even money in the bank with 0% interest might actually generate extraordinary return if they give you the flexibility to take a job with a lower salary but more purpose, or wait for investment opportunities that come when those without flexibility turn desperate.
This hidden return is becoming more important
The world used to be hyper-local
People with some skill would compete only with people in their town.
With technology now, the whole world can be competition.
We live in a hyper-connected world where intelligence is hyper-competitive.
Just intelligence is not something that would make one stand-out anymore.
Intelligence is not a reliable advantage in a world that's become as connected as ours has.
Flexibility is the biggest advantage one would have, along with soft skills like communication.
Flexibility gives you more control over your time and options, you can find a new routine, a slower pace, and think about life with a different set of assumptions. The ability to do those things when most others can't is one of the few things that will set you apart in a world where intelligence is no longer a sustainable advantage.
That's why save money.
Chapter 11: Reasonable > Rational
Aiming to be mostly reasonable works better than trying to be coldly rational.
You need to factor in your emotions as well.
If you love a strategy you're more likely to follow it even during times of turmoil.
If you love the underlying company- the team, the science behind it, etc,. then you're more likely to hold the stock even during short term periods when it's down.
When you're emotionlessly investing in the market with a strategy, your mood changes based on whether the current value of your portfolio is high or low, and you become more likely to make mistakes.
Julius Wagner-Jauregg - a 19th century psychiatrist attempted to cure neurosyphilis with malaria.
He found that fever cures his patients. So he experimented.
He tried out different diseases - some of his patients died too.
He eventually settled on malaria which gave him 6/10 success rate.
He won the nobel prize.
Fevers are good (from a rational perspective)
Small fevers are often found to reduce the risk of some problems.
It's also ok for sick children to have 100-104 degree farenheit fevers since it often fixes the disease by turning on the body's immune system.
People don't want to hurt - they don't want fevers.
The rational think isn't always the most reasonable.
It may be complete nonsense sometimes.
One should consider the philosophy of aiming to be reasonable instead of rational when making decisions with their money.
Love your investments.
Life isn't always consistent - just go with your emotions sometimes.
Chapter 12: Surprise!
History is the study of change, ironically used as a map of the future
Things that have not happened before happen all the time.
"Imagine how much harder physics would be if electrons had feelings." - Richard Feynman.
We shouldn't rely heavily on investment history as a guide to what's going to happen next.
Outlier events move the needle the most.
Small amount of individuals have affected a lot of things in the world
Small amount of projects, innovations, or events have affected most of the things in the world.
The correct lesson to learn from surprises is that the world is surprising.
History can be a misleading guide to the future of the economy and stock market because it doesn't account for structural changes that are relevant to today's world.
Benjamin Graham, the author of Intelligent Investor, has revised his book many times, updating the algorithms used or replacing them in every edition, so that it's relevant at that time.
In investing history, the further back you look, the more likely you are to be examining a world that no longer applies to today.
There's a common phrase in investing, usually used mockingly, that "It's different this time."
"The four most dangerous words in investing are 'it's different this time'" - John Templeton.
"The twelve most dangerous words in investing are, 'The four most dangerous words in investing are 'It's different this time''"
The further back in history we look, the more general our takeaways should be.
People's relationship to greed, fear, how they behave under stress and respond to incentives.
Chapter 13: Room for Error
The most important part of every plan is planning on your plan not going according to plan.
The world works on probabilities not certainties.
Give yourself a room for error for every plan.
The wisdom in having room for error is acknowledging that randomness is an ever-present part of life.
Safety tip: Increase the gap between what you think will happen and what can happen while still leaving you capable of fighting another day.
"the purpose of the margin of safety is to render the forecast unnecessary." - Benjamin Graham
Forecasters speaking in certainties gain a larger following than people who speak in probabilities.
We underestimate the odds often especially if it's related to our own decisions.
What causes us to avoid room for error:
assumption that somebody must know what the future holds
feeling that you're doing harm by not taking action that fully exploit an accurate view of that future coming true.
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.
Places for investors to think about room for error:
volatility: example, can you survive your assets declining by 30%?
retirement
you don't know the future.
Keep a 1/3 buffer
"The best way to achieve felicity is to aim low" - Charlie Munger.
"You can be risk loving and yet completely averse to ruin" - Nassim Taleb
Take only the risks that let you play more. Surviving is the most important.
Take only risks that don't diminish your savings that can let you survive unknowns in the future
The ability to do what you want, when you want, for as long as you want, has an infinite ROI.
Room for error protects you from things you cant imagine yet.
Most reliable things don't have a single point of failure
Jets have multiple engines and can fly with one and land with none.
Suspension bridges can lose many of their cables without falling.
Chapter 14: You'll Change
Long-term planning is harder than it seems because people's goals and desires change over time.
People may have had ideas of different careers for themselves when they were young than what they do now.
The End of History Illusion - the 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.
"At every stage of our lives we make decisions that will profoundly influence the lives of the people we're going to become, and then when we become those people, we're not always thrilled with the decisions we made. So young people pay good money to get tattoos removed that teenagers paid good money to get. Middle-aged people rushed to divorce people who young adults rushed to marry. Older adults work hard to lose what middle-aged adults worked hard to gain. On and on and on." - Harvard psychologist Daniel Gilbert.
"All of us are walking around with an illusion - an illusion that history, our personal history, has just come to an end, that we have just recently become the people that we were always meant to be and will be for the rest of our lives." - Daniel Gilbert.
The first rule of compounding is to never interrupt it unnecessarily - Charlie Munger.
We can't follow the same thing in life but also we can't change ourselves drastically immediately. Though, we must accept that we will change and accommodate that change in our plan too if possible.
We should avoid the extreme ends of financial planning
The fuel of the End of History Illusion is that people adapt to most circumstances, so the benefits of an extreme plan wear off. But the downsides of those extremes become enduring regrets.
We should also come to accept the reality of changing our minds
We always change and often we must change so that we're better than we are before.
We don't need to consider the past to evaluate our future behavior.
Accept the reality of change and move on as soon as possible.
"I have no sunk costs" - Daniel Kahneman, author of Thinking, fast and Slow when asked how he could start again on drafts from total scratch.
Embrace the idea that financial goals were made when you were a different person, so it's okay to abandon any without mercy when circumstances change so you can minimize your future regret. The quicker you do it the sooner you can get back to compounding.
Chapter 15: Nothing's Free
Everything has a price, but not all prices appear on labels.
This chapter is about the fact market will always have ups and downs. That's the price of investing. Often people see it as a negative - a fine. But it should be viewed as a fee. It's something that we have to pay for to avail the benefits. Like in Disney land, we have to pay the fee to enter, but it's also still possible that it might rain.
The chapter is about accepting this fact. The author gives some examples like those who bought and sold stocks based on market trends lost more than those who bought and held.
Volatility is real and common. We can't avoid it. Find the price, then pay it.
Chapter 16: You & Me
Beware taking financial cues from people playing a different game than you are.
Investors are different people having different money goals.
Problems arise when an investor tries to copy someone playing a different game.
The price of something may make sense for a day trader that's hoping to just sell at the end of the day, but it won't make sense for someone who plans to hold it for long. We shouldn't copy people's investments blindly. We should have our own plans and reasons for investing in things.
Bubbles are fueled by people's greeds.
Bubbles happen cuz of people's rational decisions to try to profit off of things in the short term - for example, housing and stuff or bitcoin. - like what they gonna do ? ignore it? nahh.
Chapter 17: The Seduction of Pessimism
Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.
People are more attracted towards negative news than positive news. Positive news seems boring/expected sometimes than negative news. That's why many doomsayers famous.
When someone says this stock will 2x or 3x your money, we don't believe them, but if someone tells us some stock in your portfolio is going to reduce a lot, then you pay attention and ask them which.
It's possibly an evolutionary advantage for us to be pessimistic.
People often underestimate things, and the speed of progress.
Chapter 18: When You'll Believe Anything
Appealing fictions, and why stories are more powerful than statistics.
If we look at the state of 2007, and 2009, we'll see that the main difference is that people's thinking changed causing the recession.
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.
We often bias our thinking towards what we want to happen.
Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.
Hindsight gives us the illusion that the world is understandable.
Chapter 19: All Together Now
This chapter is a summary of everything in the book.
Go out of your way to find humility when things go wrong and forgiveness/compassion when things 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 okay with a lot of things going wrong. You can be wrong half the time and still make a fortune.
Use money to gain control over your time.
Be nicer and less flashy.
You don't need a specific reason to save.
Define the cost of success and be ready to pay for it.
Worship room for error.
Avoid extreme ends of financial decisions.
You should like risks because it pays off over time. But you should be paranoid about ruinous risks because it prevents you from taking risks that pay off over time.
Define the game you're playing.
Respect the mess.
Chapter 20: Confessions
This chapter is about the author's own investing decisions.
The start of the chapter talks about how investors often advice different things while they invest different things. Same with doctors, they give a treatment for others than for themselves.
Morgan Housel (the author of this book) lives a very low risk life it seems.
He values patience and discipline in investing. And only invests in super low risk things.
He focusses on savings more than anything.
He keeps about 20% of assets in cash.
He choose buying a house instead of mortgage because it was psychologically reasonable despite cheaper mortgage rates.
It is enough to be financially independent. We don't need to be rich.
That's the end of this book. There's a Postscript section but I'm not that interested in it.
The thoughts above are just my understanding of the book. Let me know what you think if you're reading this.