From Morgan Housel’s “The Psychology of Money”
Chapter 1. “No One’s 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.” (p. 12)
- “Everyone has their own unique experience with how the world works. And what you’ve experienced is more compelling than what you learn second-hand. So all of us—you, me, everyone—go through life anchored to a set of views about how money works that vary wildly from person to person. What seems crazy to you might make sense to me.” (p. 13)
- “The person who grew up in poverty thinks about risk and reward in ways the child of a wealthy banker cannot fathom if he tried. The person who grew up when inflation was high experienced something the person who grew up with stable prices never had to. The stock broker who lost everything during the Great Depression experienced something the tech worker basking in the glory of the late 1990s can’t imagine. The Australian who hasn’t seen a recession in 30 years has experienced something no American ever has. On and on. The list of experiences is endless.” (p. 13)
Chapter 2. “Luck and Risk”
- “Risk and luck are doppelgangers. This is not an easy problem to solve. 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. But two things can point you in a better direction.” (p. 30)
- “Studying a specific person can be dangerous because we tend to study extreme examples—the billionaires, the CEOs, or the massive failures that dominate the news—and extreme examples are often the least applicable to other situations, given their complexity. The more extreme the outcome, the less likely you can apply its lessons to your own life, because the more likely the outcome was influenced by extreme ends of luck or risk.” (p. 31)
- “You’ll get closer to actionable takeaways by looking for broad patterns of success and failure. The more common the pattern, the more applicable it might be to your life.” (p. 31)
- “When things are going extremely well, realize it’s not as good as you think. You are not invincible, and if you acknowledge that luck brought you success then you have to believe in luck’s cousin, risk, which can turn your story around just as quickly. But the same is true in the other direction.” (p. 32)
Chapter 3. “Never Enough”
- “The question we should ask of both Gupta and Madoff is why someone worth hundreds of millions of dollars would be so desperate for more money that they risked everything in pursuit of even more.” (p. 36)
- “What Gupta and Madoff did is something different. They already had everything: unimaginable wealth, prestige, power, freedom. And they threw it all away because they wanted more. They had no sense of enough.” (p. 36)
- “There is no reason to risk what you have and need for what you don’t have and don’t need. It’s one of those things that’s as obvious as it is overlooked.” (P. 37)
- “The hardest financial skill is getting the goalpost to stop moving” (p. 37)
- “Social comparison is the problem here.” (p. 38)
- “Reputation is invaluable. Freedom and independence are invaluable. Family and friends are invaluable. Being loved by those who you want to love you is invaluable. Happiness is invaluable. And your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them. Knowing when you have enough.” (p. 39)
Chapter 4. “Confounding Compounding”
- “But good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. 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.” (p. 46)
- “81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday” (due to compounding)
Chapter 5. “Getting Wealthy vs Staying Wealthy
- “Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.” (p. 48)
- “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.” (p. 51)
- “We can spend years trying to figure out how Buffett achieved his investment returns: how he found the best companies, the cheapest stocks, the best managers. That’s hard. Less hard but equally important is pointing out what he didn’t do.
He didn’t get carried away with debt. He didn’t panic and sell during the 14 recessions he’s lived through. He didn’t sully his business reputation. He didn’t attach himself to one strategy, one world view, or one passing trend. He didn’t rely on others’ money (managing investments through a public company meant investors couldn’t withdraw their capital). He didn’t burn himself out and quit or retire.
He survived. Survival gave him longevity. And longevity—investing consistently from age 10 to at least age 89—is what made compounding work wonders. That single point is what matters most when describing his success.” (p. 52) - “Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.” (p. 54)
- “Room for error—often called margin of safety—is one of the most underappreciated forces in finance. It comes in many forms: A frugal budget, flexible thinking, and a loose timeline—anything that lets you live happily with a range of outcomes.” (p. 55)
- “Nassim Taleb put it this way: “Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.” (p. 53)
Chapter 6. “Tails, You Win”
- “Perhaps 99% of the works someone like Berggruen acquired in his life turned out to be of little value. But that doesn’t particularly matter if the other 1% turn out to be the work of someone like Picasso. Berggruen could be wrong most of the time and still end up stupendously right. A lot of things in business and investing work this way. 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. That can be hard to deal with, even if you understand the math. It is not intuitive that an investor can be wrong half the time and still make a fortune. It means we underestimate how normal it is for a lot of things to fail. Which causes us to overreact when they do.” (p. 60)
- “Steamboat Willie put Walt Disney on the map as an animator. Business success was another story. Disney’s first studio went bankrupt. His films were monstrously expensive to produce, and financed at outrageous terms. By the mid-1930s Disney had produced more than 400 cartoons. Most of them were short, most of them were beloved by viewers, and most of them lost a fortune. Snow White and the Seven Dwarfs changed everything. The $8 million it earned in the first six months of 1938 was an order of magnitude higher than anything the company earned previously.” (p. 61)
- “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.” (p. 61)
- “If a VC makes 50 investments they likely expect half of them to fail, 10 to do pretty well, and one or two to be bonanzas that drive 100% of the fund’s returns. Investment firm Correlation Ventures once crunched the numbers. 20 Out of more than 21,000 venture financings from 2004 to 2014: 65% lost money. Two and a half percent of investments made 10x–20x. One percent made more than a 20x return. Half a percent—about 100 companies out of 21,000—earned 50x or more. That’s where the majority of the industry’s returns come from. This, you might think, is what makes venture capital so risky. And everyone investing in VC knows it’s risky. Most startups fail and the world is only kind enough to allow a few mega successes.” (p. 61)
- “Forty percent of all Russell 3000 stock components lost at least 70% of their value and never recovered over this period. Effectively all of the index’s overall returns came from 7% of component companies that outperformed by at least two standard deviations. That’s the kind of thing you’d expect from venture capital. But it’s what happened inside a boring, diversified index.” (p. 62)
- “At the Berkshire Hathaway shareholder meeting in 2013 Warren Buffett said he’s owned 400 to 500 stocks during his life and made most of his money on 10 of them. Charlie Munger followed up: “If you remove just a few of Berkshire’s top investments, its long-term track record is pretty average.”
- “When you accept that tails drive everything in business, investing, and finance you realize that it’s normal for lots of things to go wrong, break, fail, and fall.” (p. 66)
Chapter 7. “Freedom”
- “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.” (p. 70)
- “Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of wellbeing than any of the objective conditions of life we have considered. More than your salary. More than the size of your house. More than the prestige of your job. 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. Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time.” (p. 70)
- “Then there’s retiring when you want to, instead of when you need to. Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with.” (p. 71)
- “The United States is the richest nation in the history of the world. But there is little evidence that its citizens are, on average, happier today than they were in the 1950s, when wealth and income were much lower—even at the median level and adjusted for inflation.” (p. 72)
- “No one—not a single person out of a thousand—said that to be happy you should try to work as hard as you can to make money to buy the things you want. No one—not a single person—said it’s important to be at least as wealthy as the people around you, and if you have more than they do it’s real success. No one—not a single person—said you should choose your work based on your desired future earning power. What they did value were things like quality friendships, being part of something bigger than themselves, and spending quality, unstructured time with their children. “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,” Pillemer writes. Take it from those who have lived through everything: Controlling your time is the highest dividend money pays.” (p. 75)
Chapter 8. “Man in the Car Paradox”
- “No one is impressed with your possessions as much as you are.” (p. 76)
- “You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does—especially from the people you want to respect and admire you.” (p. 77)
- “My point here is not to abandon the pursuit of wealth. Or even fancy cars. I like both. It’s a subtle recognition that people generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine. If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever will.” (p. 77)
Chapter 9. “Wealth is What You Don’t See”
- “Spending money to show people how much money you have is the fastest way to have less money.”
- “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.” (p. 80)
- “Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.” (p. 80)
- “It’s not hard to spot rich people. They often go out of their way to make themselves known. But 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.” (p. 81)
- “The world is filled with people who look modest but are actually wealthy and people who look rich who live at the razor’s edge of insolvency. Keep this in mind when quickly judging others’ success and setting your own goals.” (p. 82)
Chapter 10. “Save Money”
- “The only factor you can control generates one of the only things that matters. How wonderful.” (p. 84)
- “Past a certain level of income people fall into three groups: Those who save, those who don’t think they can save, and those who don’t think they need to save.” (p. 85)
- “The first idea—simple, but easy to overlook—is that building wealth has little to do with your income or investment returns, and lots to do with your savings rate.” (p. 85)
- “Investment returns can make you rich. But whether an investing strategy will work, and how long it will work for, and whether markets will cooperate, is always in doubt. Results are shrouded in uncertainty. Personal savings and frugality—finance’s conservation and efficiency—are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future as they are today.” (p. 86)
- “More importantly, the value of wealth is relative to what you need.” (p. 86)
- “People with enduring personal finance success—not necessarily those with high incomes—tend to have a propensity to not give a damn what others think about them.” (p. 88)
- “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. As I argue often in this book, money relies more on psychology than finance.” (p. 88)
- “What is the return on cash in the bank that gives you the option of changing careers, or retiring early, or freedom from worry? I’d say it’s incalculable.” (p. 89)
- “You can find a new routine, a slower pace, and think about life with a different set of assumptions. The ability to do those things when most others can’t is one of the few things that will set you apart in a world where intelligence is no longer a sustainable advantage. Having more control over your time and options is becoming one of the most valuable currencies in the world.” (p. 90)