Morgan Housel’s The Psychology of Money uses real-life anecdotes to describe how people’s financial decisions are influenced by emotion rather than logic. My notes relate to the concepts behind the anecdotes.
Doing well with money has little to do with how smart you are and a lot to do with your behavior.
The story of Ronald Read, the gas station attendant turned millionaire philanthropist, stresses that financial well-being has more to do with how you behave than what you know.
Voltaire's Observation
History never repeats itself; man always does.
Experience Matters
In theory, investment decisions should be based on the individual’s goals and the characteristics of available options. However, this is different from what people do. People make investment decisions based on their past experiences.
Individual investors’ willingness to bear risk depends on personal history.
- Most topics don’t have black-and-white answers.
- Different experiences can lead to vastly different views on a topic.
Role of Luck
Luck and risk are doppelgängers. Both remind us of external forces affecting all decisions. They both exist because the world is too complex to let 100% of one’s actions dictate 100% of one’s outcomes.
Learning from the investment strategies of others can be challenging, as it can be difficult to distinguish which outcome is due to luck and which is due to skill. Thus, it is prudent to focus less on individual case studies and more on generalized broad patterns.
Not all success is due to hard work. Not all failures are because of laziness.
Success is a lousy teacher. When things are going well, remember that the luck that pushed you forward can also shoot you in the face.
The Beauty of Having Enough
There are many invaluable things in the world — happiness, peace of mind, friends, family, reputation, freedom, and independence. No amount of money can or should replace any of these. Thus, taking excess risk to harm any of these makes no sense.
Happiness is just results minus expectations.
- The most challenging financial skill is saying you have enough.
- Accept you might have enough, even if it’s less than those around you.
- Saying you had enough is not the same as being conservative.
- Many things are not worth risking, no matter the gain.
Warren Buffet
There is no reason to risk what you have and need for what you don’t have and don’t need.
What is Wealth?
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.
Wanting to be a millionaire is different from spending a million dollars. The only way to accumulate wealth is not to spend the money you have. Wealth is hidden; it’s income that is not spent. Wealth’s value lies in providing future options, flexibility, and growth.
- Building wealth has little to do with income or returns. It is more dependent on your savings rate.
- The value of wealth is relative to what you need. The less you need, the more you have.
- Saving for saving’s sake is a powerful tool over time. Saving is a hedge against difficult times.
A common denominator of happiness is people’s desire for more control of their lives. The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. Money’s greatest intrinsic value is its ability to give you control of your time.
Generating vs. Maintaining Wealth
There are multiple ways to generate wealth, but only one way to stay wealthy: frugality plus paranoia. Getting and keeping money are separate skill sets. Generating wealth involves learning new skills and taking risks, while keeping money involves saving, being patient, and reducing risks.
The ability to stay for a long time makes the most significant difference. Time is the secret and should be the cornerstone of your strategy regarding money, investments, career, or business.
- Be financially unbreakable. This allows you to stick around for a long time, maximizing returns.
- Plan for the plan not going according to plan.
- Make sure your financial plan is as broad/general/simple as possible.
- Have short-term paranoia to exploit long-term optimism.
Compounding does not rely on earning significant returns. Average returns sustained uninterrupted for a prolonged period will always win.
Napoleon on Geniuses
A person who can do the average thing when all those around them are going crazy.
Avoiding Ruin
- Rational optimism tends to hide potential risks of ruin.
- Individuals should not take any risks that can wipe them out completely.
- To help protect against optimism bias, investors should -
- Have safety margins.
- Avoid single points of failure.
Benjamin Graham
The purpose of the margin of safety is to render the forecast unnecessary.
As individuals age, their lives transform, often encountering unexpected situations such as medical crises, embarking on new career paths, or experiencing income loss. In all these circumstances, resilience is essential. To prevent financial disaster during these times, individuals must:
- Practice moderation to avert future regret.
- Accept the reality of change and avoid sunk costs.
Bubbles
It is difficult to explain why financial bubbles occur. One reason is that investors often take innocent cues from other investors who have different goals. Bubbles cause damage when long-term investors start taking cues from short-term traders.
Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long-term to primarily short-term.
Bubbles are a self-feeding process. Bubbles aren’t so much about valuations rising. That’s just a symptom of something else: time horizons shrinking as more short-term traders enter the playing field. Money chases returns to the greatest extent possible.