“A genius is the man who can do the average thing when everyone else around him is losing his mind” – Napolean
No one is crazy
Your personal experiences with money make up maybe 0.00000001% of what has happened in the world BUT maybe 80% of how you think the world works.
People do crazy things with money. BUT no one is crazy. People 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.
The challenge for folks is that no amount of studying history can genuinely recreate the power of fear, greed, and uncertainty felt by folks living through those times. Some investing lessons have to be experienced before they can be understood.
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.
People tell themselves a story about what they are doing and why they are doing it, and that story has been shaped by their own unique experiences.
Luck and Risk
Nothing is as good or as bad as it seems
Luck and Risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort.
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.
Luck and Risk are so hard to measure, and hard to accept, that they often go overlooked.
Mark Zuckerberg declined $1 Billion offer for Facebook from Yahoo!. He is called a genius because he saw the future and stuck to his guns by rejecting the offer. Yahoo! was criticized for refusing the buyout offer from Microsoft and called fools for turning it down. What is the lesson here? No idea, because risk and luck are so hard to pin down.
The difficulty in identifying what is risk, what is luck, and what is skill is one of the biggest problems we face.
Be careful who you praise and admire. Focus less on individuals and case studies and more on broad patterns. You will get closer to actionable takeaways by looking for broad patterns of success and failure. The more common the pattern, the more applicable it might be to your life.
The trick for dealing with financial risk is arranging your 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.
Never Enough
“There is no reason to risk what you have and need for what you do not have and do not need” – Warren Buffett
The hardest financial skill is getting the goalpost to stop moving
There is someone who is always going to be richer than you, the ceiling of social comparison is so high that virtually no one will ever hit it. That means social comparison is a battle that can never be won or the only way to win it so not play it.
“Enough” is not too little; it is realizing that the opposite – the insatiable appetite for more- will push you to the point of regret.
There are many things not worth risking, no matter the potential gain. They are:
- Reputation
- Freedom and Independence
- Family and Friends
- Happiness
Confounding Compounding
Warren Buffett’s financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years. His skill is investing, his secret is time. That is how compounding works.
There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called “Shut Up and Wait”. It is just one page with a long-term chart of economic growth.
Good investing is not necessarily about earning the highest returns. It is about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That is when compounding runs wild.
Getting Vs Staying Wealthy
Good investing is not necessarily about making good decisions. It is about consistently not screwing up.
There are a million way to get wealthy but there is only one way to stay wealthy: some combination of frugality and paranoia.
Getting money is one thing, keeping it is another and if I had to summarize money success in a single word it would be “Survival”.
Applying the survival mindset to the real world comes down to appreciating three things:
- More than I want big returns, I want to be financially unbreakable. And if I am unbreakable I actually think I will get the biggest returns, because I will be able to stick around long enough for compounding to work wonders.
- Planning is important, but the most important part of every plan is to plan on the plan not going according to the plan.
- A barbelled personality-optimistic about the future, but paranoid about what will prevent you from getting to the future- is vital.
Room for error-margin of safety- is one of the most underappreciated forces in finance. It comes in many forms: A frugal budget, flexible thinking, and a loose timeline-anything that lets you live happily with a range of outcomes.
Tails, You Win
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.
Anything that is huge, profitable, famous, or influential is the result of a tail event-an outlying one in thousands or millions event. And, when most of what we pay attention to is the result of a tail, it is easy to underestimate how rare and powerful they are.
We also underestimate how normal it is for a lot of things to fail which causes us to overreact when they do.
Your success as an investor will be determined by how you respond to punctuated moments of terror(~1% of your investing days), not the years you spent on cruise control. Tails drive everything.
Freedom
Controlling your time is the highest dividend money pays.
The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want to do today”.
If there is a common denominator in happiness – a universal fuel of joy – it is that people want to control their lives.
The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. This ability is the broadest lifestyle variable that makes people happy even more than your salary, the size of your house, prestige of your job, etc.
Man in the Car Paradox
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.
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.
Someone driving a $100,000 car might be wealthy, but the only data point you have about them is they have $100,000 less than they did before or $100,000 more in debt. That’s ALL you know about them then.
We tend to judge wealth by what we see because that’s the information we have infront of us. We can’t see people’s bank accounts or brokerage statements so we rely on outward appearances to gauge financial success.
Wealth is financial assets that haven’t been converted into the stuff you see.
The world is filled with people who look modest but are actually wealthy. People are good at learning by imitation but the hidden nature of wealth makes it hard to imitate others and learn from their ways.
Save Money
The only factor you can control generates one of the only things that matters. Building wealth has little to do with your income or your investment returns, and lots to do with your savings rate.
Investment returns can make you rich. But whether an investment strategy will work, and how long it will work for, and whether markets will cooperate, is always in doubt. Personal savings and frugality are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future as they are today.
The value of wealth is relative to what you need and past a certain income what you need is just what sits below your ego. Spending beyond a pretty low level of materialism is mostly a reflection of ego.
One of the most powerful ways to increase your savings is not to raise your income BUT to raise your humility.
People with enduring personal financial success- not necessarily those with high incomes- tend to have a propensity to not give a damn what others think about them.
Saving for a specific goal makes sense in a predictable world. Ours isn’t. Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible time.
What is the return on cash in the bank that gives you the option of changing careers, or retiring early, or freedom from worry? Incalculable!
Reasonable > Rational
Aiming to be mostly reasonable works better than trying to be coldly rational.
You are not a spreadsheet. You are a person. A screwed up, emotional person.
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.
“Minimizing future regret” is hard to rationalize on paper but easy to justify in real life.
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 amount of time with your family, increases the odds of being able to stick with a plan and avoid regret.
Surprise!
History is a study of change, ironically used as a map of the future.
Things that have never happened before happen all the time.
The majority of what’s happening at any given moment in the global economy can be tied back to a handful of past events that were nearly impossible to predict.
The accurate lesson to learn from historical surprises is that the world is surprising.
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, etc. tend to be stable over time.
Room for Error
The wisdom in having room for error, is acknowledging that uncertainty, randomness, and chance 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 for fighting another day.
The purpose for the margin of safety or room for error is to render the forecast unnecessary. It lets you endure a range of potential outcomes, and endurance lets you stick around long enough to let the odds of benefiting from a low probability outcome fall in your favor.
You have to survive to succeed. Again, the ability to do what you want, when you want, for as long as you want, has an infinite ROI. But that requires building room for error in your planning.
Avoid single points of failure, and 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.
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.
It is one thing to say, “We do not know what the future holds”. It is another to admit that you, yourself, do not know today what you will even want in the future.
The End of History illusion is what psychologists call the tendency for people to be keenly aware of how much they have changed in the past but underestimate how much they will change in the future.
You and Me
Beware taking financial cues from people playing different game than you are.
It is hard to grasp that other investors have different goals than we do, because an anchor of psychology is not realizing that rational people can see the world through a different lens than your own.
We see how much money people spend on cars, homes, vacations, clothes, etc but we do not get to see their goals, worries, and aspirations.
The takeaway is that few things matter mote 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.
Seduction of Pessimism
Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.
Let’s define optimism. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way.
Tell someone that everything will be great and they are likely to either shrug you off or offer a skeptical eye. Tell someone they are in danger and you have their undivided attention. Again, pessimism is seductive. That is because progress happens too slowly 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.
All Together Now
There are universal truths in money, even if people come to different conclusions about how they want to apply those truths to their own finances;
- 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
- Use money to gain control over your time
- Be nicer and less flashy
- Just save. You do not need a specific reason to save
- Define the cost of success and be ready to pay it
- Worship room for error
- Define the game you are playing and make sure your actions are not being influenced by people playing a different game
- Respect the mess, there is no right answer, just the answer that works for you