The Psychology of Money by Morgan Housel

2024-06-10

Financial outcomes are driven by luck, independent of intelligence and effort
Financial success is not a hard science. It’s a soft skill. How you behave is more important than what you know.

Individual investors’ willingness to bear risk depends on personal history. We all make decisions based on our own unique experiences that seem to make sense to us in a given moment.

Risk and luck are doppelgangers. Be careful when assuming that 100% of outcomes can be attributed to effort and decisions.
Focus less on specific individuals and case studies and more on broad patterns. 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.
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.

$81 billion of Warren Buffet's 84 billion net worth came after his 65th birthday
Effectively all of Warren Buffett’s financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years. His skill is investing, but his secret is time. That’s how compounding works.
Good investing is 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.

Getting money requires taking risks, being optimistic, and putting yourself out there. 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.
Room for error (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. It’s different from being conservative. Conservative is avoiding a certain level of risk. Margin of safety is raising the odds of success at a given level of risk by increasing your chances of survival.
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.

"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."
Money’s greatest intrinsic value is its ability to give you control over your time.
Our days don’t end when we clock out and leave the factory. We’re constantly working in our heads, which means it feels like work never ends. You might be on the clock for fewer hours than you would in 1950. But it feels like you’re working 24/7.
Compared to generations prior, control over your time has diminished. And since controlling your time is such a key happiness influencer, we shouldn’t be surprised that people don’t feel much happier even though we are, on average, richer than ever.

Why do bubbles keep happening? Why can’t we learn our lessons?
Investors often innocently take cues from other investors who are playing a different game than they are.
Assets don't have one rational price. Investors have different goals and time horizons.
The formation of bubbles isn’t so much about people irrationally participating in long-term investing. They’re about people somewhat rationally moving toward short-term trading to capture momentum that had been feeding on itself.
Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.
Many finance and investment decisions are rooted in watching what other people do and either copying them or betting against them. But when you don’t know why someone behaves like they do, you won’t know how long they’ll continue acting that way, what will make them change their mind, or whether they’ll ever learn their lesson.
Few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are. Identify what game you are playing.

The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.
There are so many financial opinions that once you pick a strategy or side, you become invested in them both financially and mentally. If you want a certain stock to rise 10-fold, that’s your tribe. If you think a certain economic policy will spark hyperinflation, that’s your side.
Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.
Hindsight, the ability to explain the past, gives us the illusion that the world is understandable. It gives us the illusion that the world makes sense, even when it doesn’t make sense. That’s a big deal in producing mistakes in many fields.
Coming to terms with how much you don’t know means coming to terms with how much of what happens in the world is out of your control. And that can be hard to accept.

Manage your money in a way that helps you sleep at night.
Time is the most powerful force in investing. Increase your time horizon
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
Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness