The Psychology of Money by Morgan Housel
No one is crazy
“Your personal experiences with money make up maybe 0.00000000001% of what’s happened in the world, but maybe 80% of how you think the world works.”
Everyone has a unique idea of how the world works. This worldview is influence by a unique set of circumstances, values, and external influences. When people make choices, no matter how absurd it may look to you, it actually makes sense to them.
Luck and Risk
“Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort…they both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes.”
Never Enough
If you can’t recognize when you have enough, you will soon have nothing. In the blind quest for more, one might lose what one already possess
Confounding Compounding
“Good investing isn’t necessarily about earning the highest returns…It’s 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.”
The simplest fact about Warren Buffett’s fortune: He wasn’t just a good investor, he was a good investor for 75+ years.
Getting wealthy vs staying wealthy
There are many ways to get wealthy. There is one way to stay wealthy: through a combination of frugality and paranoia.
Tails, You win
“Anything that is huge, profitable, famous, or influential is the result of a tail-event — an outlying one-in-thousands or millions event.”
This is the venture capital model: If a fund makes 100 investments, they expect 80% to fail, a handful to do reasonably well and 1–2 to drive the funds returns.
Freedom
“The ability to do what you want, when you want, with who you want, for as long as you want, is priceless.”
Man in the car paradox
“When you see someone driving a nice car, you rarely think, ‘Wow, the guy driving that car is cool.’ Instead, you think, ‘Wow, if I had that car people would think I’m cool.’ Subconscious or not, this is how people think.”
People tend to not admire people who own desirable possessions but rather admire the possession.
Wealth is what you don’t see
Wealth is hidden. Wealth is income that is saved, not spent. Wealth is optionality, flexibility and growth. Wealth is the ability to purchase stuff if you needed to.
Save Money
Your savings rate is more important than your income or investment returns.
Reasonable > Rational
“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.”
Surprise!
“History helps us calibrate our expectations, study where people tend to go wrong, and offers a rough guide of what tends to work. But it is not, in any way, a map of the future.”
Room for Error
“Margin of safety — you can also call it room for error or redundancy — is the only effective way to safely navigate a world that is governed by odds, not certainties.”
You’ll Change
We are terrible predictors of our future selves. Our present needs, wants, and reams are not the same as our future needs, wants, and dreams.
Nothing’s Free
“The key to a lot of things with money is just figuring out what that price is and being willing to pay it.”
You & Me
“Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.”
The seduction of pessimism
“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.”
People mostly believe negative predictions than positive ones, it’s how we are built.
When you’ll believe anything
“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.”
