The Psychology of Money

“The world is full of obvious things which nobody by any chance ever observes.”—Sherlock Holmes

• Doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people.

• Financial outcomes are driven by luck, independent of intelligence and effort.

• Some lessons have to be experienced before they can be understood.

• Every financial decision a person makes, makes sense to them in that moment and checks the boxes they need to check. They tell themselves a story about what they’re doing and why they’re doing it, and that story has been shaped by their own unique experiences.

• Luck and risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort.

• Nothing is as good or as bad as it seems.

• Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes.

• “The customer is always right” and “customers don’t know what they want” are both accepted business wisdom.

• The difficulty in identifying what is luck, what is skill, and what is risk is one of the biggest problems we face when trying to learn about the best way to manage money.

• Bill Gates once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”

• There is no reason to risk what you have and need for what you don’t have and don’t need.

• Never Enough

  1. The hardest financial skill is getting the goalpost to stop moving.

  2. Social comparison is the problem here.

  3. “Enough” is not too little.

  4. There are many things never worth risking, no matter the potential gain.

• Happiness, as it’s said, is just results minus expectations.

• More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful. But few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child.

• There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called Shut Up And Wait. It’s just one page with a long-term chart of economic growth.

• Getting money is one thing. Keeping it is another.

• Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. 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, so past success can’t be relied upon to repeat indefinitely.

• Compounding only works if you can give an asset years and years to grow. It’s like planting oak trees: A year of growth will never show much progress, 10 years can make a meaningful difference, and 50 years can create something absolutely extraordinary.

• Applying the survival mindset to the real world comes down to appreciating three things.

  1. More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.

  2. Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.

  3. A barbelled personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.

• Compounding doesn’t rely on earning big returns. Merely good returns sustained uninterrupted for the longest period of time—especially in times of chaos and havoc—will always win.

• A plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality.

• Optimism is usually defined as a belief that things will go well. But that’s incomplete. Sensible optimism is a belief that the odds are in your favor, and over time things will balance out to a good outcome even if what happens in between is filled with misery. And in fact you know it will be filled with misery. You can be optimistic that the long-term growth trajectory is up and to the right, but equally sure that the road between now and then is filled with landmines, and always will be. Those two things are not mutually exclusive.

• Anything that is huge, profitable, famous, or influential is the result of a tail event—an outlying one-in-thousands or millions event. And most of our attention goes to things that are huge, profitable, famous, or influential. When most of what we pay attention to is the result of a tail, it’s easy to underestimate how rare and powerful they are.

• 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.

• The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”

• People want to become wealthier to make them happier. Happiness is a complicated subject because everyone’s different. But if there’s a common denominator in happiness—a universal fuel of joy—it’s that people want to control their lives.

• The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.

• Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time. To obtain, bit by bit, a level of independence and autonomy that comes from unspent assets that give you greater control over what you can do and when you can do it.

• “Your kids don’t want your money (or what your money buys) anywhere near as much as they want you. Specifically, they want you with them,”

• 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 want wealth to signal to others that they should be liked and admired. But in reality those other people often bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired.

• Someone driving a $100,000 car might be wealthy. But the only data point you have about their wealth is that they have $100,000 less than they did before they bought the car (or $100,000 more in debt). That’s all you know about them.

• We tend to judge wealth by what we see, because that’s the information we have in front of us. We can’t see people’s bank accounts or brokerage statements. So we rely on outward appearances to gauge financial success. Cars. Homes. Instagram photos.

• When most people say they want to be a millionaire, what they might actually mean is “I’d like to spend a million dollars.” And that is literally the opposite of being a millionaire.

• Wealth is hidden. It’s income not spent. 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.

• The problem for many of us is that it is easy to find rich role models. It’s harder to find wealthy ones because by definition their success is more hidden.

• Past a certain level of income, what you need is just what sits below your ego.

• Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you.

• Every bit of savings is like taking a point in the future that would have been owned by someone else and giving it back to yourself.

• Having more control over your time and options is becoming one of the most valuable currencies in the world.

• One of Graham’s criteria instructs conservative investors to avoid stocks trading for more than 1.5 times book value.

• Sunk costs—anchoring decisions 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. It’s the equivalent of a stranger making major life decisions for you.

• Every job looks easy when you’re not the one doing it.

• Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way.

• Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention.

• There are lots of overnight tragedies. There are rarely overnight miracles.

• 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.

• Expecting things to be great means a best-case scenario that feels flat. Pessimism reduces expectations, narrowing the gap between possible outcomes and outcomes you feel great about.

• When planning we focus on what we want to do and can do, neglecting the plans and skills of others whose decisions might affect our outcomes.

• We focus on what we know and neglect what we do not know, which makes us overly confident in our beliefs.

• Luck and risk are both real and hard to identify. Do so when judging both yourself and others. Respect the power of luck and risk and you’ll have a better chance of focusing on things you can actually control. You’ll also have a better chance of finding the right role models.

• No matter how much you earn, you will never build wealth unless you can put a lid on how much fun you can have with your money right now, today.

• Manage your money in a way that helps you sleep at night. That’s different from saying you should aim to earn the highest returns or save a specific percentage of your income. Some people won’t sleep well unless they’re earning the highest returns; others will only get a good rest if they’re conservatively invested. To each their own. But the foundation of, “does this help me sleep at night?” is the best universal guidepost for all financial decisions.

• If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon. Time is the most powerful force in investing. It makes little things grow big and big mistakes fade away. It can’t neutralize luck and risk, but it pushes results closer towards what people deserve.

• Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune, because a small minority of things account for the majority of outcomes. No matter what you’re doing with your money you should be comfortable with a lot of stuff not working. That’s just how the world is. So you should always measure how you’ve done by looking at your full portfolio, rather than individual investments. It is fine to have a large chunk of poor investments and a few outstanding ones. That’s usually the best-case scenario. Judging how you’ve done by focusing on individual investments makes winners look more brilliant than they were, and losers appear more regrettable than they should.

• Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness. The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance.

• Be nicer and less flashy. No one is impressed with your possessions as much as you are. You might think you want a fancy car or a nice watch. But what you probably want is respect and admiration. And you’re more likely to gain those things through kindness and humility than horsepower and chrome.

• Save. Just save. You don’t need a specific reason to save. It’s great to save for a car, or a downpayment, or a medical emergency. But saving for things that are impossible to predict or define is one of the best reasons to save. Everyone’s life is a continuous chain of surprises. Savings that aren’t earmarked for anything in particular is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.

• Define the cost of success and be ready to pay it. Because nothing worthwhile is free. And remember that most financial costs don’t have visible price tags. Uncertainty, doubt, and regret are common costs in the finance world. They’re often worth paying. But you have to view them as fees (a price worth paying to get something nice in exchange) rather than fines (a penalty you should avoid).

• Worship room for error. A gap between what could happen in the future and what you need to happen in the future in order to do well is what gives you endurance, and endurance is what makes compounding magic over time. Room for error often looks like a conservative hedge, but if it keeps you in the game it can pay for itself many times over.

• Avoid the extreme ends of financial decisions. Everyone’s goals and desires will change over time, and the more extreme your past decisions were the more you may regret them as you evolve.

• You should like risk because it pays off over time. But you should be paranoid of ruinous risk because it prevents you from taking future risks that will pay off over time.

• Define the game you’re playing, and make sure your actions are not being influenced by people playing a different game.

• Respect the mess. Smart, informed, and reasonable people can disagree in finance, because people have vastly different goals and desires. There is no single right answer; just the answer that works for you.

• Independence, to me, 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.

• Comfortably living below what you can afford, without much desire for more, removes a tremendous amount of social pressure that many people in the modern first world subject themselves to.

• Good decisions aren’t always rational. At some point you have to choose between being happy or being “right.”

• The first rule of compounding is to never interrupt it unnecessarily.