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Insights From The Psychology Of Money Pt.2 (#49)

There's an interesting article about Elon Musk from his weird-ass baby mama Grimes ( on his lifestyle and thought it applied perfectly to this book. 


Some of us might think what Grimes said about Elon is a lie or PR gimmick - but think about it - the personal finance sacrifices entrepreneurs like him take to make it, and what Grimes talks about in the article makes a lot more sense.


Time To Read (7 minutes)

The Seduction of Pessimism And Why It Sounds Smart


  • “For reasons I have never understood, people like to hear that the world is going to hell.” - Deirdre McCloskey

  • Pessimism isn’t just more common than optimism. 

    • It also sounds smarter. It’s intellectually captivating, and it’s paid more attention than optimism, which is often viewed as being oblivious to risk. 

  • “A constant drumbeat of pessimism usually drowns out any triumphalist song…If you say the world has been getting better you may get away with being called naive and insensitive.” - Matt Ridley, The Rational Optimist

  • There are valid reasons why pessimism is seductive when dealing with money.

    •  Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.


Reasonable > Rational 


  • Aiming to be mostly reasonable works better than trying to be coldly rational. 

    • Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. 

    • The reasonable investors who love their technically imperfect strategies have an edge, because they’re more likely to stick with those strategies. 

    • If you’re passionate about the company of being 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. 

  • “Home investing bias” ⇒ People prefer to invest in companies from the country they live in while ignoring the other 95%+ of the planet. 

  • Day trading and picking individual stocks is not rational for most investors - the odds are heavily against your success. 

    • They’re both reasonable in small amounts if they scratch an itch hard enough to leave the rest of your more diversified investments alone.


History Is The Study Of Surprising Events


  • Scott Sagan “Things that have never happened before happen all the time.”

  • History is mostly the study of surprising events. But it is often used by investors and economists as an unassailable guide to the future. 

    • Do you see the irony? 

    • Do you see the problem?

  • A trap that many investors fall into is what I call “historians as prophets” fallacy. 

  • The mental trick we play on ourselves here is an over-admiration of people who have been there, done that, when it comes to money.

    • Experiencing specific events does not necessarily qualify you to know what will happen next. 

    • Experience leads to overconfidence more than forecasting ability. 

  • The problem is that we often use events like the Great Depression and World War II to guide our views of things like worst-case scenarios when thinking about future investment returns. 

    • But those record-setting events had no precedent when they occured. 

  • What you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. 

    • That’s the correct lesson to learn from surprises: that the world is surprising. 

  • Common plot of economic history that is too easily forgotten by pessimists who forecast in straight lines. 

    • A third is that progress happens too slowly to notice, but setbacks happen too quickly to ignore. 


Why Recessions Have Become Less Frequent

  • There are plenty of theories on why recessions have become less frequent. 

    • One is that the Fed is better at managing the business cycle, or at least extending it. 

    • Another is that heavy industry is more prone to boom-and-bust overproduction than the service industries that dominated the last 50 years. 

    • The pessimistic view is that we now have fewer recessions, but when they occur they are more powerful than before

  • Only 2.5% of Americans owned stocks on the eve of the great crash of 1929 that sparked the Great Depression.

    • So closely had the others watched the market and regarded it as an index of their fates that they suddenly stopped much of their economic activity.


What’s Wrong With One Of The Greatest Investing Books Of All Time


  • The Intelligent Investor is one of the greatest investing books of all time (Written By Benjamin Graham - Warren Buffett’s mentor)

    • But I don’t know a single investor who has done well implementing Graham’s published formulas.

    • “I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities.” - Benjamin Graham (much later on)

  • Since economies evolve, recent history is often the best guide to the future, because it’s more likely to include important conditions that are relevant to the future. 

    • An interesting quirk of investing history is that the further back you look, the more likely you are to be examining a world that no longer applies to today.


4 Most Dangerous Words In Investing/History Of Human Nature

  • John Templeton’s view that “The four most dangerous worlds in investing are, “it’s different this time.”

    • Templeton, though, admitted that it is different at least 20% of the time. 

  • It’s good to understand 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. 


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 purpose of the margin of safety is to render the forecast unnecessary.

  • Two things cause us to avoid room for error

    • One is the idea that somebody must know what the future holds, driven by the uncomfortable feeling that comes from admitting the opposite.

    • Second is that you’re therefore doing yourself harm by not taking actions that fully exploit an accurate view of that future coming true.

  • The biggest gains occur infrequently, either because they don’t happen often or because they take time to compound. 

    • Person with enough room for error in part of their strategy (cash) to let them endure hardship in another (stocks) has an edge over the person who gets wiped out, game over, insert more tokens, when they’re wrong. 


Bill Gates And His Room For Error W/Early Microsoft

  • When Microsoft was a young company, Bill Gates said he “came up with this incredibly conservative approach that I wanted to have enough money in the bank to pay a year’s worth of payroll even if we didn’t get any payments coming in.”


Can You Survive 30% Losses To Your Assets?

  • It is easy to underestimate what a 30% decline does to your psyche. 

    • Your confidence may become shot at the very moment opportunity is at its highest. 

    • I know several investors who quit after losses because they were exhausted.

  • Nassim Taleb says “You can be risk loving and yet completely averse to ruin.”

    • No risk that can completely wipe you out is ever worth taking.

  • Leverage - taking on debt to make your money go further - pushes routine risks into something capable of producing ruin. 


Biggest Point Of Failure With Money

  • The biggest 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. 

  • The ability to do what you want, when you want, for as long as you want, has an infinite ROI. 

  • A good rule of thumb for a lot of things in life is that everything that can break will eventually break. 


You’ll Change, Sunk Costs And Regrets


  • The End of History Illusion is what psychologists call the tendency for people to be keenly aware of how much they’ve changed in the past, but to underestimate how much their personalities, desires, and goals are likely to change in the future. 

  • Regrets are especially painful when you abandon a previous plan and feel like you have to run in the other direction as fast to make up for lost time. 

  • We should also come to accept the reality of our changing minds. 

  • Sunk costs - anchoring decisions to past efforts that can’t be refunded - are a devil in a world where people change over time. 

Compounding & Growth


  • Charlie Munger says the first rule of compounding is to never interrupt it unnecessarily.

  • 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. 

    • This same thing applies to business, where it takes years to realize how important a product or company is, but failures can happen overnight. 

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