We all play this game of life for money. But Money is the one who actually play with us. It's a hard topic, taboo for most. Most go to college, universities and then get a job just to work for money.
I want to work for myself, not for money. Hell no, I am far from those dreams. Money still haunts me.
But things that haunt you also teaches you a lot. So is the story of Money. It's has least to do with your smartness or cunningness but a lot with your behavior.
This is an article for me and everyone else out there who wants to learn about Money, a summary of the book "The Psychology of Money" by Morgan Housel.
Thanks Morgan Housel for such an amazing book!
No One's Crazy
Everyone is living in there own space, you, me, everyone. Everyone got their own different view and perspective of the world. Your experiences are unique to you. What you do with your money is based on that, not mine. So what you do with money might seem crazy to me, but not to you.
"Some lessons have to be experienced before they can be understood"
– Michael Batnick
Different experiences lead to vastly different views withing topics that one side intuitively thinks should be black and white. It more like a spectrum.
And the game of money isn't governed by rules, but by peoples mind. Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.
Luck & Risk
Nothing is good or as bad as it seems.
Luck and risks are often seen two completely different entities. The reality being they are not. Instead look at them as close siblings. They are reality that every outcome in life is guided by forces other than individual effort.
We look at particular cases of extremeness, and form our point of view.
Worst nuclear accidents, or plane crashes make us go against them, but we forget the broad reality that nuclear plants cause a lot less death per Tera joules of energy compared to coal, or air transportation has more survivability rate than any other means of transportation.
In the same way, we make our financial decision solely based on extremes or pioneers of this game, Warren Buffett, Charlie Munger; disregarding their case of risk and luck.
We need to give luck and risk that proper respect. Realize that when judging people's financial success—both your own and other's—it's never as good or as bad it seems.
So what is luck? what is skill? what is risk? Author proposed two points to guide us:
Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
Therefore, focus less on specific individuals and case studies and more on broad patterns
When things are going extremely well, realize it's not as good as you think. You are not invincible, and if acknowledge that luck brought you success then you have to believe in luck's cousin, risk, which can turn your story around just as quickly.
Have a sense of what's enough, not just for money.
There is no reason to risk what you have and need for what you don't have and don't need.
There are few points that we need to remember:
The hardest financial skill is getting the goalpost to stop moving.
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 a big problem.
The only way to win in a Las Vegas casino is to exit as soon as you enter.
The same is true for the game of trying to keep up with other people's wealth.
"Enough" is not too little
"Enough" is realizing that an insatiable appetite for more—will push you to the point of regret.
There are many things never worth risking, no matter the potential gain.
Don't get too attached to anything—your reputation, your accomplishments or any of it.
$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.
Modern world loves speed. Nature doesn't. World doesn't. Everything takes time , patience and is often following a cycle.
Warren Buffett skill might be investing, but his secret is time.
Take your time, be steady, and embrace nature.
Getting Wealthy vs. Staying Wealthy
Everyone wants to get wealthy, so people talk how they can get wealthy. No one talks how to stay wealthy.
To stay wealthy in the real world appreciate these three things:
More than aiming for big returns, aim for becoming financially unbreakable
Most important part of every plan is to plan on the plan not going according to plan
A barbelled personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.
Tails, You Win
The world oddly favors tails. Tails drive everything.
About 90% of startups fail, 10% of startups fail the year they are born.
The other way to look toward this 80-20 rule, the 80% of the results come from the 20% of the effort you put. It's ok if life throws bricks at you, your task to get over it and do the next.
Napolean'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.
Angus Campbell, a psychologist at University of Michigan, puts happiness this way:
Having a strong sense of controlling one's life is a more dependable predictor of positive feelings of wellbeing that any of the object conditions of life we have considered.
Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that makes people happy.
We might have already left the sense of what happiness is; late night working hours for a job that still pays you the same is BS. Embrace the balance and separation of work and life is needed.
In his book 30 Lessons for Living, gerontologist Karl Pillemer writes:
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 by 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.
Man in the Car Paradox
People tend to want wealth to signal to others that they should be liked and admired. But in reality they don't...your wealth becomes a benchmark for their own desire to be liked and admired.
You would probably never get the respect and admiration when you show off your expensive house, that watch or your luxurious car.
You get the respect and admiration when you add value to others life.
Wealth is What You Don't See
We don't really understand the difference between a rich and health:
Rich is a current income. It's what you are shown by them, what they own and is visible to you.
Wealth is hidden. It's income not spent.
The way to be rich is to spend money you have.
And the way to be wealthy is to not spend the money that you don have. It's really that simple.
Save Money—for the sake of saving
Morgan puts it like this:
Past a certain level of income people fall into three groups: Those who save, those who don't think they can save, and those who don't think they need to save.
The points below are for latter two groups...
Building wealth has little to do with your income or investment returns, and lots to do with your savings rate
We can build without high income, but with a high saving rate
More importantly, the value of wealth is relative to what you need
Learning to be happy with less money creates a gap between what you have and what you want—similar to the gap you get from growing your paycheck, but easier and more in control.
Past a certain level of income, what you need is just what sits below your ego
When you define savings as the gap between your ego and your income you realize why many people with decent incomes save so little.
So people's ability to save is more in their control than they might think
Savings ➡️spending less ➡️desire less ➡️ Care less about what other think of you.
And you don't need a specific reason to save
Save for the sake of saving
That flexibility and control over your time is an unseen return on wealth
Reasonable > Rational
Don't aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable.
History is the study of change, ironically used as a map of the future
Experiencing specific events does not necessarily qualify you to know what will happen next. In fact it rarely does, because experience leads to overconfidence more than forecasting ability.
Two dangerous things happen when you rely too heavily on investment history:
You'll likely miss the outlier events that move the needle the most
History can be 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
"The four most dangerous words in investing are, 'it's different this time'"
—Investor John Templeton
Room for Error
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 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.
People are poor forecasters of their future selves. Long-term financial planning is essential. But thing change—both the world around you, and your own goals and desire.
Charlie Munger says the first rule of compounding is to never interrupt it unnecessarily.
Two things are to be kept in mind when making what you think are long-term decisions:
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, both 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
Everything has a price, but not all prices appear on labels.
With investing, volatility is almost always a fee, not a fine.
The volatility/uncertainty fee—the price of returns—is the cost of admission to get returns greater than low-fee parks like cash and bonds. Convince yourself that the market's fee is worth it and it's the way to deal with volatility and uncertainty.
Beware taking financial cues from people playing different game than you
Few things atter 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.
The seduction of Pessimism
Real optimism isn't the belief that everything will be great, instead it is the belief that odds of a good outcome are in your favor over time, even when there will be setbacks along the way.
Optimism is good the listen to when you have a end of the world scenario. But before those scenario pessimism sounds smarter and more plausible than optimism. Especially in the case of money. Why?
Money is ubiquitous, so something bad happening tends to affect everyone and captures everyone's attention.
A steady growth of 0.1% in market for past one year, might not sound good. But a fall will easily catch everyone's eyes.
Another is that pessimists often extrapolate present trends without accounting for how markets adapt
Extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways.
A third is that progress happens too slow to notice, but setbacks happen too quickly to ignore.
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.
When You'll believe anything
Stories are the most powerful force in economy. They are fuel the tangible parts of the economy work, or brake that holds our capabilities back.
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
The bigger the gap between what you want to be true and what you need to be true to have an acceptable outcome, the more you are protecting yourself from falling victim to an appealing financial fiction.
Everyone has incomplete view of the world. But we form a complete narrative to fill in the gaps