The Psychology of Money by Morgan Housel

1. Modern financial markets are new. There is no ironclad conventional wisdom yet.
2. Create your plan such that you can stay in the game long enough for compound interest to run wild.
3. Markets are driven by people, who are liable to be confused, biased, or seduced by stories.

No One's Crazy

• Your personal experiences make 0.000000001% of history's events but maybe 80% of how you think the world works
• People's lifetime investment decisions are anchored in what's going on during their lives as young adults (e.g. inflation, depression, stock boom)

• Modern finance is NEW.
• Retirement not considered a normal goal until 1980s
• 401k introduced in 1978, Roth IRA in 1998, index funds less than 50y old, hedge 25y.
• We're not crazy, this is just new - no conventional wisdom and our evolved biology certainly doesn't serve us

Luck & Risk

• Bill Gates vs Kent Evans. 1 in million odds for both outcomes (Microsoft, billionaire vs. early grave from accident).
• If you make a decision & it turns out poorly, it's possible it was the right decision & you just ended on the wrong side of the probability table.
• Don't judge failures too harshly or praise successes too lavishly.

• The more extreme the outcome (amazing or terrible), the less applicable it probably is to you (because of risk/luck).
• For actionable takeaways, look instead for broad patterns.

Never Enough

• The hardest financial skill is to stop goalpost sliding.
• Social comparison is a key driver of this. By definition, there's always someone with more.
• The only way to win is not to fight.

• "Enough" is not about conservatism — it's recognizing that insatiable appetite for more will cause regret.

Confounding Compounding

• Compounding interest is not intuitive. It is surprising how it adds up.
• Starting early is how you get numbers to run wild.

• It is an often overlooked driver for success
• Buffet is worth $84.5b. Of that, $84.2b came after his 50th bday. $81.5b came after his mid 60s.

• For investing, it's about earning pretty good returns for the longest possible period of time.

Getting Wealthy vs. Staying Wealthy

• 40% of companies successful enough to IPO lost basically ALL of their value over time.

• Great quotes
• Sequoia Capital: "We assume that tomorrow won't be like yesterday. We can't afford to rest on our laurels. We can't be complacent."
• Nassim Taleb: "Having an 'edge' and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs."

• The goal should be staying alive & investing long enough for compounding to work wonders, not seeking outrageous returns.
• Preventing one desperate, ill-timed stock sale can do more for your lifetime returns than picking dozens of big-time winners.

• Many bets fail not because they were wrong, but because they were mostly right in a situation that required things to be precisely right. You need room for error - margin of safety.
• Margin of safety raises the odds of success by providing a wider range of acceptable 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.
• Walt Disney being breakeven until Snow White. Several hundreds of hours of film vs. 83 minutes being magnitudes of order more successful.
• Buffet has owned 400-500 stocks in his life, made most of his money on 10. If you remove just a few top investments, long term track record is pretty average.

• Since 1980, effectively all returns for the Russell 3000 index have come from 7% of companies that outperformed by at least 2 standard deviations. 40% of all component companies lost >70% of their value and never recovered.
• You'd expect that in VC, but it's happening in an index fund!

• Over the course of your lifetime as an investor, the decisions that you make today or tomorrow or next week will not matter nearly as much as what you do during the small number of days - likely 1% of the time or less - when everyone else around you is going crazy.
• How you behaved in '08 had more impact than everything you did from '00 to '08

• If you're a good investor, most years will be just OK, and plenty will be bad.

Freedom

• The highest form of wealth is the ability to wake up every morning and say "I can do whatever I want today.". Money's greatest value is to give you control of your time.
• Strong sense of controlling one's life predicts positive feelings better than pay, prestige etc.

• Doing something you love on a schedule you can't control can feel the same as doing something you hate.
• Knowledge worker - your deliverable is the product of your thinking. Tool is your head. You might be on the clock for fewer hours, but it can feel like you work 24/7.

• Takeaways from elderly Americans:
• No one said work as hard as you can to make money to buy things you want
• No one said important to be as wealthy as those around you
• No one said choose your work based on desired earning power
• Valued: quality friendships, being a part of something bigger, quality unstructured time with kids

Man in the Car Paradox

• When people see a luxury thing, they imagine themselves in it — more than they are impressed with you
• "Wow the guy driving that car is cool" vs. "If I had that, ppl would think I'm cool"
• The only thing you know for sure when you see someone in a $100k car, is that they have $100k less in the bank than before they bought it

Wealth is What You Don't See

• When most people say they want to be a millionaire, what they actually mean is "I'd like to spend a million dollars." That's the opposite of being a millionaire.

Save Money

• Building wealth has little to do with income or investment returns. Has lots to do with savings rate.
• Professional investors who grind 80 hours to get 1/10% more, but there are 2-3% of lifestyle bloat that could be addressed with less effort
• People with enduring personal finance success tend to not give a damn what others think of them.
• Save by spending less. Spend less by desiring less. Desire less when you care less what others think.
• You do not need a specific purchase to save for. Save for control of your time and options.

Reasonable > Rational

• Basically, remember you're a human & need to sleep at night. Accept some emotionality in your investing, don't always need to go with 100% perfectly optimal rational choices.
• Historical odds of making money in US markets are 50/50 over 1 day, 68% over 1 year, 88% over 10 years, and so far 100% over 20 years.

Surprise!

• "Things that have never happened before happen all the time." Scott Sagan
• History helps calibrate expectations, understand mistakes and offers rough guide. But it is NOT a map of the future.

• Investing is not a hard science. Massive group of people making imperfect decisions with limited information about things that have massive impact on wellbeing (makes smart people nervous, greedy, paranoid).
• Experiencing specific events doesn't necessarily qualify you to know what will happen next. Actually leads to overconfidence.

• Rely too much on history? Two bad things happen:
• You will miss outlier events that move the needle the most
• WWII, Vaccines. Fukushima earthquake prep, Nile floodwater prep.
• Most important econ events of the future will be unprecedented, no guide from past

• Misled by history b/c of many recent structural changes in today's world
• 401k is 42 years old. VC is 25 years old. No financials in S&P until 76, now 16% of the index. No tech 50 years ago, now 20% of the index.
• Graham's formulas don't work anymore. He said so himself. Great wisdom, but nothing trades that cheap anymore. The world changed.
• Don't ignore history - but the farther back you look, the more general your takeaway should be.

Room for Error

• Margin of safety: Pursuing things where a range of potential outcomes are acceptable. Keeping you in the game until the odds work in your favor.
• This is the only effective way to safely navigate a world governed by odds, not certainties.
• You have to take risk to get ahead, but no risk that can wipe you out is ever worth taking.

• Two reason we avoid: more comfortable if someone knows the future, fear of doing yourself harm by not fully exploiting an accurate view of that future coming true.

• 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.

• The shit that happens is not predictable (lawsuit), you can't do it. Guard against damage by avoiding single points of failure. Anything that can break eventually will.

You'll Change

• End of History Illusion - people are aware of how much they have changed, but underestimate how much they WILL change (personalities, desires, goals)
• Avoid extreme ends of financial planning (being super poor or working super hard)

Nothing's Free

• Like everything else, investing demands a price. The price is volatility, fear, doubt, uncertainty & regret - all of which are easy to overlook until you're dealing with them in real time.
• Graph: you spend most of your time in the market >5% below a previous all time high
• When you lose, it feels like a fine for doing something wrong rather than the price of ultimate success. Doubly true if you've never experienced a 20% drop.

• Trying to time the market is grand theft auto, trying to get the return without paying the price.
• Analysis of tactical, active funds found they gained less, more volatile or were subject to just as much downside risk as hands off fund. You pay more by trying to avoid the price.

You & Me

• Incalculable damage from: the idea that assets have one rational price in a world where investors have different timelines and goals.
• 30 year vs 10 year vs 1 year vs day trader
• Investors take cues from each other despite different games being played

• Bubbles form when the momentum of short term gains attracts enough money that the composition of investors shifts from mostly long to mostly short term (feeds itself).
• The more short term everyone is looking, the more likely it's a bubble. About somewhat rational movement towards short-term to capture momentum
• Housing crisis: $700k 2 bedroom makes sense if your plan is to quick flip for profit
• Bubbles do their damage when long-term investors playing one game start taking cues from short-term traders playing another. Many investment decisions rooted in watching others (copying or betting against). But if you don't know why someone is behaving that way, you don't know how long they'll keep doing it or when they'll change their mind.

• Key takeaway: few things matter more than knowing your own time horizon & not being persuaded by behaviors of people playing a different game.

The Seduction of Pessimism

• Pessimism sounds smarter. Tell everyone it'll be great, shrug. Tell everyone danger, undivided attention.
• WSJ front page in '08 crisis: Russian professor's outlook that USA will break apart

• Few question why the market went up — but all want an explanation as to why it went down
• Many forget that extreme tails rarely stay that way for long, adaptation in hard to predict ways
• Prediction of oil shortage —> got better at extracting oil & dug in Alaska

• Progress happens too slow to notice, setbacks happen too quickly to ignore.

When You'll Believe Anything

• Stories are, by far, the most powerful force in the economy.
• Want something to be true? More likely to believe a story that overestimates the odds of it being true. Pick a side and you get entrenched.
• 85% of active mutual funds have underperformed their benchmark. But still people invest $5T today.
• Bigger the gap b/w what you want to be true & need to be true for an acceptable outcome, more you protect yourself from falling victim to an appealing fiction.

• Everyone has an incomplete view, but form complete narrative to fill in the gaps
• When confronted with something people don't understand, most don't realize it b/c they come up with an explanation that makes sense based on their unique experiences/views, but those are limited. We need the world to make sense, so tell stories to fill in gaps.

All Together Now

• If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.
• Define the cost of success & be ready to pay it. Uncertainty, doubt, regret are common costs. Fees, not penalties.
• Seek risk, but be paranoid of ruinous risk.

Confessions

• Most proud of: stopped goalpost sliding their lifestyle desires at a young age
• Independence is our top goal.
• "True success is exiting some rat race to modulate one's activities for peace of mind" Taleb
• The independent feeling I get from owning house exceeds gain from market alternative
• Everyone, without exception, will eventually face a huge expense they did not expect
• One of my deeply held investing beliefs is that there is little correlation b/w investment effort and investment results. Majority of the world driven by tails: few variables account for the majority of returns.
• No matter how hard you try at investing you won't do well if you miss the 2 or 3 things that move the needle in your strategy.
• Mine doesn't rely on picking sector, timing. It relies on savings rate, patience, and optimism in global economy for decades to come.

Misc

"Some lessons have to be experienced before they can be understood" - Michael Batnick

Being able to wake up & change your work, on your terms, whenever you're ready is big.

Only doing work you like w/ people you like at times you like for as long as you like

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