The Psychology of Money is without a doubt the best book I've read this year.
Unlike most "traditional" books about money and investing that focus on the latest trends and fads, this book focuses on what doesn't change; the ever-present, unchanging quirks of human nature that stay consistent across cultures and generations. Morgan's writing have, above all, hardened my belief that in life is better to avoid stupidity than seeking brilliance.
- Money has more to do with psychology that it has with maths and statistics.
- People do some crazy things with money. But no one is crazy. Here's the thing: People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons.
- Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think about money.
- Luck plays a large role in financial outcomes but we often forget about it or rationalise it away, especially when it comes to bad luck.
- Learn when enough is enough. “Modern capitalism is a pro at two things: generating wealth and generating envy. But life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations”.
- Compounding is magical. Compounding a little over a long period of time will drive bigger results than a few big wins. But compounding is counterintuitive because our brains are accustomed to linear thinking and compounding is exponential.
- Because of how compounding works, the most important skill in business and investing is to stay in the game for as long as possible to allow compounding to work its magic.
- In finance, the single most powerful thing you can do is increase your time horizon.
- Getting wealthy and staying wealthy require two, very different, sets of skills. The first rule of investments is don’t lose money. In a capitalist world only the paranoid survive.
- Tail events drive everything. In life, as in business, a tiny number of extreme events drive the majority of results. 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. This is particularly true in finance where the vast majority of your returns will be driven by a tiny handful or events or companies.
- Happiness is the ability to control your time. Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that makes people happy. You should use money to gain control over your time.
- Save money. Building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
- When making financial decisions, do not aim to be coldly rational. 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.
- Minimising future regret is hard to rationalise on paper but easy to justify in real life. A rational investor makes decisions based on numeric facts. But investing has a social component that’s often ignored when viewed through a strictly financial lens.
- History is mostly the study of surprising events. As Scott Sagan said: “Things that have never happened before happen all the time”. Yet ironically history is often used by investors as a guide to the future.
- The most important events in historical data are the big outliers, the record-breaking events. The majority of what’s happening in any given moment in the global economy can be tied back to a handful of past events. Tail events again.
- The thing about outlier events is that by definition they can’t be predicted.
- You have to plan on your plan not going according to the plan. In other words, you have to give yourself room for error acknowledging that randomness and chance are an ever present part of life.
- Forecasting with precision is hard. The purpose of having room for error is that it makes forecasting less important. By being able to withstand a blow you don’t need to forecast accurately or even at all.
- The biggest gains occur infrequently, either because they don’t happen often or because they take time to compound. So the person with enough room for error in part of their strategy to let them endure hardship in another has and edge over the person who gets wiped out.
- This ties back to the concepts of compounding and savings: compounding takes time to work its magic; survival is the only thing that matters in the long term; remember: only the paranoid survive long enough to let compounding do its course.
- Everything changes including our preferences, tastes, jobs, etc. You can’t predict what you will like 10 years from now, nor what your risk profile will be. This is what makes long-term financial planning complicated.
- Everything has a price, but not all prices appear on labels. In investing you must identify the price of success —volatility and temporary losses— and be willing to pay it.
- Stories are more powerful than statistics. A desperate person will always believe what they need to believe.