Contents:
- No One’s Crazy
- Luck and Risk
- Never Enough
- Confounding Compounding
- Getting Wealthy vs. Staying Wealthy
- Tails, You Win
- Freedom
- Man in the Car Paradox
- Wealth is what you don’t see
- Save Money
- Reasonable > Rational
- Surprise!
- Room for Error
- You’ll Change
- Nothing’s Free
- You & Me
- The Seduction of Pessimism
- When You’ll Believe Anything
- All Together Now
- Confession
1. No One’s Crazy
Your personal experiences with money make up maybe 0.0000000.1% of what’s happened in the world, but maybe 80% of how you think the world works.
Everyone has their own unique experience with how the world works. And what you’ve experienced is more compelling than what you learn second- hand. So all of us—you, me, everyone—go through life anchored to a set of views about how money works that vary wildly from person to person. What seems crazy to you might make sense to me.
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.
2. Luck and Risk
Nothing is as good or as bad as it seems.
Bill Gates experienced one in a million luck by ending up at Lakeside. Kent Evans experienced one in a million risk by never getting to finish what he and Gates set out to achieve. The same force, the same magnitude, working in opposite directions.
Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. 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.
Someone else’s failure is usually attributed to bad decisions, while your own failures are usually chalked up to the dark side of risk. When judging your failures I’m likely to prefer a clean and simple story of cause and effect, because I don’t know what’s going on inside your head.
Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
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.
3. Never Enough
When rich people do crazy things
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The hardest financial skill is getting the goalpost to stop moving.
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Social comparison is the problem here.
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“Enough” is not too little.
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There are many things never worth risking, no matter the potential gain.
4. Confounding Compounding
$81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday. Our minds are not built to handle such absurdities
The practical takeaway is that the counterintuitiveness of compounding may be responsible for the majority of disappointing trades, bad strategies, and successful investing attempts.
You can’t blame people for devoting all their effortto trying to earn the highest investment returns. It intuitively seems like the best way to get rich.
But 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.
Good investing is 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.
5. Getting Wealthy vs. Staying Wealthy
Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.
There’s only one way to stay wealthy: some combination of frugality and paranoia.
Applying the survival mindset to the real world comes down to appreciating three things.
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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.
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Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
A frugal budget, flexible thinking, and a loose timeline—anything that lets you live happily with a range of outcomes.
It’s different from being conservative. Conservative is avoiding a certain level of risk. Margin of safety is raising the odds of success at a given level of risk by increasing your chances of survival.
- A barbelled personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.
You need short-term paranoia to keep you alive long enough to exploit long-term optimism.
6. Tails, You Win
You can be wrong half the time and still make a fortune
A lot of things in business and investing work this way. 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.
Out of more than 21,000 venture financings from 2004 to 2014: 65% lost money. Two and a half percent of investments made 10x–20x. One percent made more than a 20x return. Half a percent—about 100 companies out of 21,000—earned 50x or more. That’s where the majority of the industry’s returns come from.
A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.
Tails drive everything.
7. Freedom
Controlling your time is the highest dividend money pays.
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.
People like to feel like they’re in control—in the drivers’ seat. When we try to get them to do something, they feel disempowered. Rather than feeling like they made the choice, they feel like we made it for them. So they say no or do something else, even when they might have originally been happy to go along.
When you accept how true that statement is, you realize that aligning money towards a life that lets you do what you want, when you want, with who you want, where you want, for as long as you want, has incredible return.
8. Man in the Car Paradox
No one is impressed with your possessions as much as you are.
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.
It’s a subtle recognition that people generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine. If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever will.
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.
There is no faster way to feel rich than to spend lots of money on really nice things. But the way to be rich is to spend money you have, and to not spend money you don’t have. It’s really that simple.
But wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now.
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. Keep this in mind when quickly judging others’ success and setting your own goals.
10. Save Money
The only factor you can control generates one of the only things that matters. How wonderful.
Building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
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.
So people’s ability to save is more in their control than they might think.
And you don’t need a specific reason to save.
That flexibility and control over your time is an unseen return on wealth.
And that hidden return is becoming more important.
In a world where intelligence is hyper-competitive and many previous technical skills have become automated, competitive advantages tilt toward nuanced and soft skills—like communication, empathy, and, perhaps most of all, flexibility.
Having more control over your time and options is becoming one of the most valuable currencies in the world.
11. Reasonable > Rational
Aiming to be mostly reasonable works better than trying to be coldly rational.
Aiming to be reasonable instead of rational—is one more people should consider when making decisions with their money.
Invest in a promising company you don’t care about, and you might enjoy it when everything’s going well. But when the tide inevitably turns you’re suddenly losing money on something you’re not interested in. It’s a double burden, and the path of least resistance is to move onto something else. If you’re passionate about the company to begin with—you love the mission, the product, the team, the science, whatever—the inevitable down times when you’re losing money or the company needs help are blunted by the fact that at least you feel like you’re part of something meaningful. That can be the necessary motivation that prevents you from giving up and moving on.
12. Surprise!
History is the study of change, ironically used as a map of the future.
A trap many investors fall into is what I call “historians as prophets” fallacy: An overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress.
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You’ll likely miss the outlier events that move the needle the most.
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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.
What this means, in effect, is that all historical data going back just a few decades about how startups are financed is out of date. What we know about investment cycles and startup failure rates is not a deep base of history to learn from, because the way companies are funded today is such a new historical paradigm.
The further back in history you look, the more general your takeaways should be.
General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tend to be stable in time. The history of money is useful for that kind of stuff.
But specific trends, specific trades, specific sectors, specific causal relationships about markets, and what people should do with their money are always an example of evolution in progress. Historians are not prophets.
13. Room for Error
The most important part of every plan is planning on your plan not going according to plan
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.
The purpose of the margin of safety is to render the forecast unnecessary.
14. You’ll Change
Long-term planning is harder than it seems because people’s goals and desires change over time.
An underpinning of psychology is that people are poor forecasters of their future selves.
But there are two things to keep in mind when making what you think are long-term decisions:
- We should avoid the extreme ends of financial planning.
Aiming, at every point in your working life, to have moderate annual savings, moderate free time, no more than a moderate commute, and at least moderate time with your family, increases the odds of being able to stick with a plan and avoid regret than if any one of those things fall to the extreme sides of the spectrum.
- We should also come to accept the reality of changing our minds.
Sunk costs — anchoring decisions to past efforts that can’t be refunded — are a devil in a world where people change over time. They make our future selves prisoners to our past, different, selves. It’s the equivalent of a stranger making major life decisions for you.
15. Nothing’s Free
Everything has a price, but not all prices appear on labels.
The question is: Why do so many people who are willing to pay the price of cars, houses, food, and vacations try so hard to avoid paying the price of good investment returns?
The answer is simple: The price of investing success is not immediately obvious. It’s not a price tag you can see, so when the bill comes due it doesn’t feel like a fee for getting something good. It feels like a fine for doing something wrong. And while people are generally fine with paying fees, fines are supposed to be avoided.
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.
16. You & Me
Beware taking financial cues from people playing a different game than you are.
Investors often innocently take cues from other investors who are playing a different game than they are.
Few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.
17. The Seduction of Pessimism
Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.
Things make financial pessimism easy, common, and more persuasive than optimism:
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One is that money is ubiquitous, so something bad happening tends to affect everyone and captures everyone’s attention.
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Another is that pessimists often extrapolate present trends without accounting for how markets adapt.
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A third is that progress happens too slowly to notice, but setbacks happen too quickly to ignore.
18. When You’ll Believe Anything
Appealing fictions, and why stories are more powerful than statistics.
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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.
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Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.
19. All Together Now
What we’ve learned about the psychology of your own money.
Few short recommendations that can help you make better decisions with your money:
- Go out of your way to find humility when things are going right and forgiveness/compassion when they 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 OK 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.
- Save. Just save. You don’t need a specific reason to save.
- Define the cost of success and be ready to pay it.
- Worship room for error.
- Avoid the extreme ends of financial decisions.
- You should like risk because it pays off over time.
- Define the game you’re playing.
- Respect the mess.
20. Confessions
The psychology of my own money.
Charlie Munger once said “I did not intend to get rich. I just wanted to get independent.”
Nassim Taleb explained: “True success is exiting some rat race to modulate one’s activities for peace of mind.”
“The first rule of compounding is to never interrupt it unnecessarily.”
Over the years I came around to the view that we’ll have a high chance of meeting all of our family’s financial goals if we consistently invest money into a low-cost index fund for decades on end, leaving the money alone to compound.
We invest money from every paycheck into these index funds—a combination of U.S. and international stocks.
There’s no set goal—it’s just whatever is leftover after we spend. We max out retirement accounts in the same funds, and contribute to our kids’ 529 college savings plans.
And that’s about it. Effectively all of our net worth is a house, a checking account, and some Vanguard index funds.
My investing strategy doesn’t rely on picking the right sector, or timing the next recession.
It relies on a high savings rate, patience, and optimism that the global economy will create value over the next several decades.
No matter how we save or invest I’m sure we’ll always have the goal of independence, and we’ll always do whatever maximizes for sleeping well at night.