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Insights From The Psychology Of Money Pt. 1 (#46)

This is a book I’m sure many of us wish we read in our early early 20s. Very good, simple, short to read and full of insights and lessons.

Time to read: 7 minutes

How To Do Well With Money

  • Doing well with money has a little to do with how smart you are and a lot to do with how you behave.
    • Behavior is really really hard to teach, even to really smart people.
  • “History never repeats itself, man always does.” - Voltaire

Why Rihanna Nearly Went Bankrupt

  • Rihanna nearly went bankrupt in 2009 after overspending and sued her financial advisor. 
    • The advisor responded “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?” (https://www.businessinsider.com/rihanna-was-nearly-bankrupt-in-2009-2014-2)
  • The only way to be wealthy is to not spend the money that you do have. 
  • 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. 
  • Most people, deep down, want to be wealthy. They want freedom and flexibility. 

Never Enough

  • Modern capitalism is a pro at two things:
    • generating wealth
    • generating envy
  • Perhaps these two things go hand in hand; wanting to surpass your peers can be the fuel of hard work. 

What is Enough?

  • “Enough” is not too little.
    • Reputation is invaluable.
    • Freedom and independence are invaluable. 
    • Family and friends are invaluable. 
    • Being loved by those who you want to love is invaluable. 
    • Happiness is invaluable.

Man In The Car Paradox

  • No one is impressed with your possessions as much as you are. 
  • People tend to want wealth to signal to others that they should be liked and admired. 
    • What you want is respect and admiration from other people, and you think having expensive stuff will bring it.
  • 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. 
  • We tend to judge wealth by what we see, because that’s the information we have in front of us. 
  • Modern capitalism makes helping people fake it until they make it a cherished industry. 

Fun In Life & Happiness

  • Life isn’t any fun without a sense of enough. 
  • Happiness, as it’s said, it’s just results minus expectations. 
  • There is no reason to risk what you have and need for what you don’t have and don’t need. 
  • The hardest financial skill is getting the goalpost to stop moving.

How To Win In A Vegas Casino

  • “The only way to win in a Las Vegas casino is to exit as soon as you enter’.

Getting Wealthy Vs. Staying Wealthy

  • There’s only one way to stay wealthy: some combination of frugality and paranoia.
  • Capitalism is hard - Getting money and keeping money are 2 different skills.
    • Getting money - requires taking risks, being optimistic, and putting yourself out there
    • Keeping money - requires the opposite of taking risks. 
      • It requires humility, and fear that what you’ve made can be taken away from you just as fast. 
      • It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck
  • The ability to stick around for a long time should be the cornerstone of your strategy, whether it’s investing or your career or a business you own. 
  • Two reasons why a survival mentality is so key with money.
    • One is the obvious: few gains are so great that they’re worth wiping yourself out over. 
    • The counterintuitive math of compounding.

How Warren Buffett Made His Money

  • How Warren Buffett achieved his investment returns.
    • He didn’t attach himself to one strategy, one world view, or one passing trend. 

Having A Edge Vs. Surviving

  • Nassim Taleb put it this way: “Having an ‘edge’ and surviving are 2 different things: the first requires the second. 
    • You need to avoid ruin. At all costs. 
  • Preventing one desperate, ill-timed stock sale can do more for your lifetime returns than picking dozens of big-time winners. 
  • No one wants to hold cash during a bull market

Confounding Compounding

  • 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. 
    • It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time.

Planning & Margin Of Safety 

  • Planning is important, but the most important part of every plan is to plan on the plan not going according to plan 
    • The more you need specific elements of a plan to be true, the more fragile your financial life becomes. 
    • margin of safety (room for error) - is raising the odds of success at a given level of risk by increasing your chances of survival.
    • It comes in many forms: 
      • A frugal budget 
      • flexible thinking
      • a loose timeline - anything that lets you live happily with a range of outcomes. 

Being Paranoid And Optimistic (Barbell Personality)

  • A mindset that can be paranoid and optimistic at the same time is hard to maintain yet vital, because seeing things as black or white takes less effort than accepting nuance. 
  • “A great many smashes by brilliant men can be traced directly to the swelled head”  - Jesse Livermore. 

Tails, You Win (Art Dealers and 7% of Gains)

  • The great art dealers operated like index funds. 
    • They bought everything they could. 
    • They bought it in portfolios, not individual pieces they happened to like
  • 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. 
  • Of the Russell 3000 Index (a big, broad, collection of public companies) - All of the returns came from 7% of the component’s companies.
    • That’s the kind of thing you’d expect from venture capital. 
  • The idea that a few things account for most results is an important part of your own behavior as an investor. 

FUD (Fear, Uncertainty and Doubt) and Generational Investing

  • Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.
  • The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty. 
  • “Some lessons have to be experienced before they can be understood.” - Investor Michael Batnick.
  • The economists found that people’s lifetime investment decisions are heavily anchored to the experiences (usually in their early adult life) those investors had in their own generation.

How To Be An Investing Genius

  • 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. 
  • When we pay special attention to a role model’s success we overlook that their gains came from a small percent of their actions. 

Freedom 

  • The highest form of wealth is the ability to wake up every morning and say “I can do whatever I want today.”
  • Six months’ emergency expenses means not being terrified of your boss, because you know you won’t be ruined if you have to take some time off to find a new job
  • Doing something you love on a schedule you can’t control can feel the same as doing something you hate. 
  • Compared to generations prior, control over your time has diminished. 

Rockefeller Habits

  • John D. Rockefeller was one of the most successful businessmen of all time. 
    • He was also a recluse, spending most of his time by himself. 
    • He rarely spoke, deliberately making himself inaccessible and staying quiet when you caught his attention. 
    • Rockefeller’s job wasn’t to drill wells, load trains, or move barrels. It was to think and make good decisions. 

Save Money

  • Building wealth has little to do with your income or investment returns, and lots to do with your savings rate. 
  • 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.
  • When you don’t have control over your time, you’re forced to accept whatever bad luck is thrown your way. 

40% Of Americans

  • 40% of Americans cannot come up with $400 in an emergency.

Lessons From 30 Lessons Of Living: Tried and True Advice from the Wisest Americans 

  • 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 buy the things you want. 
  • 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 a real success. 
  • Not a single person - said you should choose your work based on your desired future earning power. 
  • What they did value were things like quality friendships, being part of something bigger than themselves, and spending quality, unstructured time with their children. 
  • Controlling your time is the highest dividend money pays. 

Retiring In America Is A New Concept

  • Before World War II most Americans worked until they died. That was the expectation and the reality. 
    • The labor force participation rate of men age 65 and over was above 50% until the 1940s. 
  • The 401(k) - the backbone savings vehicle of American retirement - did not exist until 1978. The Roth IRA was not born until 1998.

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