This book sets out to show that money should be thought of through emotions rather than rules and laws. Through understanding greed, insecurity and agony rather than just numbers. Financial accomplishment is not only about figures and charts and spreadsheets for your money. It’s largely determined by behaviour, and how the decisions you arrive at make you feel. Investment is a complicated and personal issue and there is not one way to do it. Rather there are guiding principles which you should use to find out what works for you. The author explains some of these principles as well as some typical flaws in our relationship with money.
Luck plays a tremendous role in successful outcomes despite being tremendously hard to measure. In the grand scheme of things, two people with same skill set making the same decisions often end up with wildly different results as a result of so many moving parts in the universe. We do not have a means to measure what percentage of successful outcomes are as a result of repeatable actions and what proportion on luck.
“Realize that not all success is due to hard work and not all poverty is due to laziness. Keep this in mind when judging people, including yourself. …focus less on specific individuals and case studies and more on broad patterns.”
It is necessary to have a "point of enough". If ambition grows much faster than satisfaction, you run the risk of always comparing with those who have achieved more than you - a game you cannot win.
The benefits and gigantic effects of compounding (interest) cannot be overemphasized.
Getting money requires taking risks and putting yourself out there while keeping money requires being frugal.
Sensible optimism is vital mindset to cultivate. It entails knowing that things will workout well over time, even if there are tremendous ups and down in between. Not just that things will go well.
We overestimate how normal it is for things to fail, hence tend to overreact when they do. A large percent of endeavours are failures. It's the few that succeed and overshadow the failures, that get noticed, and then the failures don't matter. A few things usually account for most results, yet it doesn't seem intuitive because we only see the successes and not the failures. This is important to know in order not to look at role modes' successes and feel our failures mean we are doing something wrong - they have encountered tons of failure too on the road to where they are.
The greatest determinant of happiness, is not wealth or prestige, but being able to do what you want when you want.
"Money's greatest intrinsic value,...is is ability to give you control over your time."
"Doing something you love on a schedule you can't control can feel the same as doing something you hate." Median family income has tripled in the last 50 years. Happiness level though, do not seem to have budged. The transition of jobs from labor intensive to knowledge work - where a lot involves thinking, together with remote work, has made it such that we work virtually 24/7 even while we are away from our offices and tools. Hence we have even less control of our time. “Independence…doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want.”
People are not impressed with your possessions as you think. Wealth and possessions are desired as a signal to others that we are successful. Yet when looking at successful people's possessions, we think about the item and how it would look on us or if we owned it, rather than thinking of the person who does own it.
Building wealth has more to do with your savings than income. To be more wealthy, increase your savings. "One of the most powerful ways to increase your savings isn't to raise your income. It's to raise your humility". Saving gives you the flexibility and patience to wait for a better opportunity. Riches are demonstrated in money that is spent. Wealth is defined as what is accumulated, that you don't spend.
We cannot predict the future based on history. Unprecedented events have had and will have a massive effect on the market in the future. People's preferences and the stories they tell themselves over time are also changing. It is useful to look back at history to understand people's relationship to greed, fear and stress when it comes to finance. But the further back you look, the more you should beware of specific trends, trades and markets as these are changing with the times and also very highly influenced by outlier events like a war, a pandemic, a depression etc. which are not predictable.
Consider a margin for error in your financial decisions so you have a cushion and are not highly influenced by mishaps. Eg assume your future returns on investment will be lower than they have historically been and when something unexpected happens requiring you to spend some money which was dedicated for investment, you are not hit hard if at all, say on your chances of meeting your retirement goal. Do not take risks that cannot be compensated for by a margin of safety. Avoid single points of failure such as relying on a paycheck with no savings.
It is essential to save also because you do not know how, but can be sure that your goals and desires will change in the future. Look at how they have changed in the past 5 years if you need proof. For this reason, avoid making now the decision either that you will be very happy with low income (e.g. as long as you have freedom or can travel or live in a specific location etc. ) or the decision now to work endless hours to guarantee financial stability. These 2 extremes often lead to regret later when your desires change and you feel like you have to put in double the effort to counter the decision your younger self took, when you realize that you won’t be able to afford retirement on the low income or that you spent your life chasing money at the expense of family, friends etc and other more meaningful pursuits. Balance is key. Save enough in order to accommodate the consequences and demands of your inevitably changing desires. And accept the reality that your mind is changing. “Sunk costs - anchoring to past efforts that can’t be refunded- are a devil in a world where people change over time. They make our future selves prisoners to our past, different, selves.”
Volatility, uncertainty and fear are the price of long-term reward in the stock market. Endeavor to think of these as fees rather then fines, lest you try to cut corners in an attempt to beat the market. This will also give you the mindset to stick around long enough to harvest investing gains.
Do not copy an investment strategy without understanding the investor's goals and timeline. You can't see their worries, aspirations or what will make them change their minds. Buying a stock at a given price or time could make total sense for someone who intends to trade in a few hours and be completely ridiculous for someone else who was planning to hold. What game are YOU playing? Write your mission statement down if it helps you remember your own individual goal and timeline. e.g. " I am a passive investor who believes in an uptrend of the market in the long run."
"Bubbles aren't so much about valuations rising ...[but] time horizons shrinking as more short-term traders enter the playing field."
We are more likely to believe in something when we want it to be true. Especially when there is a good backing story. We have a tendency to erroneously believe very highly in events that have low probability of success if they have the possibility to change our lives. This is the reason why people would risk all their money betting or investing in a fund that tries to predict the stock market .
We tell ourselves coherent stories about what’s going on irrespective of how little or how much we know about what’s going on. You only know what you know and view the world through that lens. So you attribute causes and consequences based on your mental models. Which are different from the next persons'. Predicting the market, forecasting in general, is filling in the blind spots in your mental model with expectations and assumptions from your knowledge base.
“We have to think the world we operate in makes sense based on what we happen to know.”
This is a short, concise book with several examples to communicate vital lessons about money. If you cannot read the entire book, read the last 2 chapters in which the author summarizes the 20 lessons of the book succinctly and eventually describes his personal financial strategies.