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# The Psychology of Money by Morgan Housel

Rating: 9 / 10

## Thoughts

I thoroughly enjoyed this book. It is a very sobering read. Highly recommended if you want to learn about how we think about money — and better ways to do so.

# 💡 Top 3-5 Ideas, Concepts, or Quotes

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

Humility, kindness, and empathy will bring you more respect than horsepower ever will.

Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more.

A good rule of thumb for a lot of things in life is that everything that can break will eventually break. So if many things rely on one thing working, and that thing breaks, you are counting the days to catastrophe. That’s a single point of failure.

Every job looks easy when you’re not the one doing it because the challenges faced by someone in the arena are often invisible to those in the crowd.

# ✍️ Summary

• We're all different. No one's crazy.
• Someone else's failure is attributed to bad decisions while we attribute our own to the dark side of risk. We spin up wild narratives to justify past decisions and attribute bad outcomes to risk.
• Not all success is due to hard work. Not all poverty is due to laziness.
• "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."

• If you want to study how people became successful, look for broad patterns.
• Luck and risk plays a big part in our outcomes, but we cannot measure them. Be careful when looking at other people — you do not know if their position is merely a byproduct of chance.
• The hardest financing skill is getting the goalpost to stop moving. But it's one of the most important.
• Compounding is how you get the ball rolling. It's how Warren Buffett became rich. Start your compounding process early. The biggest results come from compounding over long periods of time.

• Compounding takes time to get going. A year is almost nothing. 10 years is a good deal. 50 years can create something absolutely extraordinary.
• There are many ways to get wealthy, but only one way to stay wealthy: "some combination of frugality and paranoia."

• Getting money is about taking risks, being optimistic, and getting yourself out there.
• Keeping money is the opposite of taking risk. You need humility — and fear of losing everything you've built up. It requires frugality, and accepting that "at least some of what you've made is attributable to luck, so past success can't be relied upon to repeat indefinitely."
• Your money retention strategy should be survival.
• Plan on the plan not going according to plan. A plan is only useful if it can survive reality.
• Make a margin for error in your financial plan. If you depend on it coming to fruition, your plan is fragile.
• You don't have to be right every time.
• Happiness depends on the amount of control you feel you have.
• Use your wealth to purchase freedom. There is nothing more important, because it leads to your own happiness and life satisfaction.
• If you spend money on things, you'll end up with the things and not the money.
• Wealth is what we don't see. The money not spent. And wealth is what you want — it's where the freedom is.
• Save your money. Not necessarily for some specific goal. Just save your money. The benefits are incalculable.

• "Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more."
• Being rational is hard for a human. Instead, try to be reasonable. Then you'll stick to your plan.
• The world is unpredictable. "Things that have never happened before happen all the time."

• The world is full of surprises. We can't analyze history and think that nothing different will ever happen. Especially in investing. There are so many moving cogs in economics. So many investors, who are unpredictable, because they have feelings. You can't predict what will happen.
• You can love risks but afraid of ruin. Never let anything ruin you. Not in wealth or in anything else. Just like you wouldn't (nor shouldn't) ever play Russian Roulette.
• Assume that you'll change later in life and plan accordingly. Aim for balance, not either end of the extremes. Then you can adjust.
• Think of market volatility as a fee rather than a fine. There's a price to pay for the returns you can find in the market; and that price is volatility. The ups and downs. Just keep your money in the market. That's how you get the returns.
• The price you pay for a stock depends on who you are. What your goals are. Your time horizons. When people recommend stocks, it's based on their goals — their time horizons. Take them with a grain of salt — they are not you.
• Pessimism is more alluring than optimism. Doomsayers are listened more attentively to than optimists. They aren't always right. A lot of people think the world is doing worse than it is.
• We all think we know what's going on. We tell ourselves stories to match our beliefs. Where there are gaps in our knowledge, we fill in stories. The reality is that we don't know what we don't know.

# 🔦📒 Highlights & Notes

## Introduction: The Greatest Show On Earth

The more I studied and wrote about the financial crisis, the more I realized that you could understand it better through the lenses of psychology and history, not finance.
To grasp why people bury themselves in debt you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism. To get why investors sell out at the bottom of a bear market you don’t need to study the math of expected future returns; you need to think about the agony of looking at your family and wondering if your investments are imperiling their future.

The premise of this book is that 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 success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.

Morgan calls this skill the 'psychology of money'.

It’s not a long book. You’re welcome. Most readers don’t finish the books they begin because most single topics don’t require 300 pages of explanation. I’d rather make 20 short points you finish than one long one you give up on.

Agree 100%

## 1. No One’s Crazy

Chapter summary:

We are all individuals with different lives. We are inherently different, so the choices one person makes may seemingly be crazy to others, but normal to themselves. Besides this, most money and economic things are relatively new concepts. We are newbies at them. If someone chooses to spend their money differently, it's not because they're crazy. They just don't think about it in the same way that you do.

Something so big and so important hitting society so fast explains why, for example, so many people have made poor decisions with student loans over the last 20 years. There is not decades of accumulated experience to even attempt to learn from. We’re winging it.
Same for index funds, which are less than 50 years old. And hedge funds, which didn’t take off until the last 25 years. Even widespread use of consumer debt—mortgages, credit cards, and car loans—did not take off until after World War II, when the GI Bill made it easier for millions of Americans to borrow.

Dogs were domesticated 10,000 years ago and still retain some behaviors of their wild ancestors. Yet here we are, with between 20 and 50 years of experience in the modern financial system, hoping to be perfectly acclimated.
For a topic that is so influenced by emotion versus fact, this is a problem. And it helps explain why we don’t always do what we’re supposed to with money.

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.

People lead different lives. They have different experiences.

You know stuff about money that I don’t, and vice versa. You go through life with different beliefs, goals, and forecasts, than I do. That’s not because one of us is smarter than the other, or has better information. It’s because we’ve had different lives shaped by different and equally persuasive experiences.

Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works. So equally smart people can disagree about how and why recessions happen, how you should invest your money, what you should prioritize, how much risk you should take, and so on.

The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty.

I can read about what it was like to lose everything during the Great Depression. But I don’t have the emotional scars of those who actually experienced it. And the person who lived through it can’t fathom why someone like me could come across as complacent about things like owning stocks. We see the world through a different lens.

Spreadsheets can model the historic frequency of big stock market declines. But they can’t model the feeling of coming home, looking at your kids, and wondering if you’ve made a mistake that will impact their lives. Studying history makes you feel like you understand something. But until you’ve lived through it and personally felt its consequences, you may not understand it enough to change your behavior.

We all think we know how the world works. But we’ve all only experienced a tiny sliver of it.

As investor Michael Batnick says, “some lessons have to be experienced before they can be understood.” We are all victims, in different ways, to that truth.

The economists found that people’s lifetime investment decisions are heavily anchored to the experiences those investors had in their own generation—especially experiences early in their adult life.

If you grew up when inflation was high, you invested less of your money in bonds later in life compared to those who grew up when inflation was low. If you happened to grow up when the stock market was strong, you invested more of your money in stocks later in life compared to those who grew up when stocks were weak.

The economists wrote: “Our findings suggest that individual investors’ willingness to bear risk depends on personal history.”

But 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.

## 2. Luck & Risk

Chapter Summary:

Luck and risk play a big part in our outcomes. We cannot measure them. So be careful when looking at successful people, or huge failures, because how do you know if their position merely is a byproduct of chance?

Look for general patterns. The more common they are, the more applicable they are for you.

The dangerous part of this is that we’re all trying to learn about what works and what doesn’t with money.
What investing strategies work? Which ones don’t?
What business strategies work? Which ones don’t?
How do you get rich? How do you avoid being poor?
We tend to seek out these lessons by observing successes and failures and saying, “Do what she did, avoid what he did.”

See next highlight

There are so many examples of this.
Countless fortunes (and failures) owe their outcome to leverage.
The best (and worst) managers drive their employees as hard as they can.
“The customer is always right” and “customers don’t know what they want” are both accepted business wisdom.
The line between “inspiringly bold” and “foolishly reckless” can be a millimeter thick and only visible with hindsight.
Risk and luck are doppelgangers.

Where's the lesson? We can't see the role of risk or luck. See pointing in better direction ->

### But two things can point you in a better direction.

One

Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.

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

One in a million high-school-age students attended the high school that had the combination of cash and foresight to buy a computer. Bill Gates happened to be one of them.

Gates is staggeringly smart, even more hardworking, and as a teenager had a vision for computers that even most seasoned computer executives couldn’t grasp. He also had a one in a million head start by going to school at Lakeside.

Bill Gates' school had a computer when almost no other school had one.

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. They are driven by the same thing: You are one person in a game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.

If we had a magic wand we would find out exactly what proportion of these outcomes were caused by actions that are repeatable, versus the role of random risk and luck that swayed those actions one way or the other. But we don’t have a magic wand. We have brains that prefer easy answers without much appetite for nuance. So identifying the traits we should emulate or avoid can be agonizingly hard.

We similarly think Mark Zuckerberg is a genius for turning down Yahoo!’s 2006 $1 billion offer to buy his company. He saw the future and stuck to his guns. But people criticize Yahoo! with as much passion for turning down its own big buyout offer from Microsoft—those fools should have cashed out while they could! What is the lesson for entrepreneurs here? I have no idea, because risk and luck are so hard to pin down. 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. Or, just be careful when assuming that 100% of outcomes can be attributed to effort and decisions I want you to be successful, and I want you to earn it. But realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself. From Housel's letter to his son. Two Therefore, focus less on specific individuals and case studies and more on broad patterns. 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. 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. ## 3. Never Enough Crime committed by those living on the edge of survival is one thing. A Nigerian scam artist once told The New York Times that he felt guilty for hurting others, but “poverty will not make you feel the pain.” 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. They are extreme examples. But there are non-criminal versions of this behavior. A friend of mine makes an annual pilgrimage to Las Vegas. One year he asked a dealer: What games do you play, and what casinos do you play in? The dealer, stone-cold serious, replied: “The only way to win in a Las Vegas casino is to exit as soon as you enter.” That’s exactly how the game of trying to keep up with other people’s wealth works, too. The idea of having “enough” might look like conservatism, leaving opportunity and potential on the table. I don’t think that’s right. “Enough” is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret. 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. At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, “Yes, but I have something he will never have … enough.” John Bogle once told this story Let me offer two examples of the dangers of not having enough, and what they can teach us. See examples below. If you risk something that is important to you for something that is unimportant to you, it just does not make any sense. There is no reason to risk what you have and need for what you don’t have and don’t need. 1. The hardest financial skill is getting the goalpost to stop moving. But it's one of the most important skills. You feel as if you’re falling behind, and the only way to catch up is to take greater and greater amounts of risk. 2. Social comparison is the problem here. It's a battle that can never be won. It's always on to the next one. It's never enough. The point is that the ceiling of social comparison is so high that virtually no one will ever hit it. Which means it’s a battle that can never be won, or that the only way to win is to not fight to begin with—to accept that you might have enough, even if it’s less than those around you. 3. “Enough” is not too little. 4. There are many things never worth risking, no matter the potential gain. ## 4. Confounding Compounding If something compounds—if a little growth serves as the fuel for future growth—a small starting base can lead to results so extraordinary they seem to defy logic. It can be so logic-defying that you underestimate what’s possible, where growth comes from, and what it can lead to. And so it is with money. ### On Warren Buffet's wealth 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. As I write this Warren Buffett’s net worth is$84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday.$81.5 billion came after he qualified for Social Security, in his mid-60s.

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.

The practical takeaway is that the counterintuitiveness of compounding may be responsible for the majority of disappointing trades, bad strategies, and successful investing attempts.
You can’t blame people for devoting all their effort—effort in what they learn and what they do—to trying to earn the highest investment returns. It intuitively seems like the best way to get rich.
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.

This highlight is basically the chapter summary.

Start your compounding process early. The biggest results come from compounding over long periods of time.

The big takeaway from ice ages is that you don’t need tremendous force to create tremendous results.

Gives story about the five ice ages and this is the 'point'

## 5. Getting Wealthy vs. Staying Wealthy

There are a million ways to get wealthy, and plenty of books on how to do so.
But there’s only one way to stay wealthy: some combination of frugality and paranoia.

Getting money is one thing.
Keeping it is another.

getting money and keeping money are two different skills.
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.

There are two reasons why a survival mentality is so key with money.
One is the obvious: few gains are so great that they’re worth wiping yourself out over.
The other, as we saw in chapter 4, is the counterintuitive math of compounding.

If I had to summarize money success in a single word it would be “survival."

Not “growth” or “brains” or “insight.” The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. This should be the cornerstone of your strategy, whether it’s in investing or your career or a business you own.

Survival should be your money retention strategy

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.

But getting and keeping that extraordinary growth requires surviving all the unpredictable ups and downs that everyone inevitably experiences over time.

### Applying the survival mindset

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.

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.

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

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

A good plan doesn’t pretend this weren’t true; it embraces it and emphasizes room for error. The more you need specific elements of a plan to be true, the more fragile your financial life becomes. If there’s enough room for error in your savings rate that you can say, “It’d be great if the market returns 8% a year over the next 30 years, but if it only does 4% a year I’ll still be OK,” the more valuable your plan becomes.

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

A mindset that can be paranoid and optimistic at the same time is hard to maintain, because seeing things as black or white takes less effort than accepting nuance. But you need short-term paranoia to keep you alive long enough to exploit long-term optimism.

People are different, have different goals, and in investing, different horizons.

Don't think that everyone has the same goals as you do - that's a recipe for disaster.

## 6. Tails, You Win

“I’ve been banging away at this thing for 30 years. I think the simple math is, some projects work and some don’t. There’s no reason to belabor either one. Just get on to the next.”
—Brad Pitt accepting a Screen Actors Guild Award

Napoleon’s definition of a military genius was, “The man who can do the average thing when all those around him are going crazy.”
It’s the same in investing.
Most financial advice is about today. What should you do right now, and what stocks look like good buys today?
But most of the time today is not that important. 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.

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.
Tails drive everything.

Tail events are rare events that drive the largest returns.

Take Amazon. It’s not intuitive to think a failed product launch at a major company would be normal and fine. Intuitively, you’d think the CEO should apologize to shareholders. But CEO Jeff Bezos said shortly after the disastrous launch of the company’s Fire Phone:
If you think that’s a big failure, we’re working on much bigger failures right now. I am not kidding. Some of them are going to make the Fire Phone look like a tiny little blip.

The Chris Rock I see on TV is hilarious, flawless. The Chris Rock that performs in dozens of small clubs each year is just OK. That is by design. No comedic genius is smart enough to preemptively know what jokes will land well. Every big comedian tests their material in small clubs before using it in big venues. Rock was once asked if he missed small clubs. He responded:
When I start a tour, it’s not like I start out in arenas. Before this last tour I performed in this place in New Brunswick called the Stress Factory. I did about 40 or 50 shows getting ready for the tour. (Page 0)

There is the old pilot quip that their jobs are “hours and hours of boredom punctuated by moments of sheer terror.” It’s the same in investing. Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.

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.

You don't have to be right every time.

There are fields where you must be perfect every time. Flying a plane, for example. Then there are fields where you want to be at least pretty good nearly all the time. A restaurant chef, let’s say.

In some fields, however, you have to be right every time

Investing, business, and finance are just not like these fields.

Something I’ve learned from both investors and entrepreneurs is that no one makes good decisions all the time. The most impressive people are packed full of horrendous ideas that are often acted upon.

It’s OK for Amazon to lose a lot of money on the Fire Phone because it will be offset by something like Amazon Web Services that earns tens of billions of dollars. Tails to the rescue.

These are not delusions or failures of responsibility. They are a smart acknowledgement of how tails drive success. For every Amazon Prime or Orange is The New Black you know, with certainty, that you’ll have some duds.

When we pay special attention to a role model’s successes we overlook that their gains came from a small percent of their actions

“It’s not whether you’re right or wrong that’s important,” George Soros once said, “but how much money you make when you’re right and how much you lose when you’re wrong.” You can be wrong half the time and still make a fortune.

## 7. Freedom

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.

The most powerful common denominator of happiness was simple. Campbell summed it up:
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.

There is a name for this feeling. Psychologists call it reactance. Jonah Berger, a marketing professor at the University of Pennsylvania, summed it up well:
People like to feel like they’re in control—in the drivers’ seat. When we try to get them to do something, they feel disempowered. Rather than feeling like they made the choice, they feel like we made it for them. So they say no or do something else, even when they might have originally been happy to go along.²⁵

Definition of reactance

In his book 30 Lessons for Living, gerontologist Karl Pillemer interviewed a thousand elderly Americans looking for the most important lessons they learned from decades of life experience. He wrote:
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.

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

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.

Control = happiness

A small amount of wealth means the ability to take a few days off work when you’re sick without breaking the bank. Gaining that ability is huge if you don’t have it.

A bit more means waiting for a good job to come around after you get laid off, rather than having to take the first one you find. That can be life changing.

Six months’ emergency expenses means not being terrified of your boss, because you know you won’t be ruined if you have to take some time off to find a new job.

More still means the ability to take a job with lower pay but flexible hours. Maybe one with a shorter commute. Or being able to deal with a medical emergency without the added burden of worrying about how you’ll pay for it.

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.

When you accept how true that statement is, you realize that aligning money towards a life that lets you do what you want, when you want, with who you want, where you want, for as long as you want, has incredible return. (Page 0)

We now many more thought-worker jobs than ever before. The consequence is that it's hard to 'get off work'. It follows you home in your mind.

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.

This mostly summarizes this chapter. Use your wealth to purchase freedom. There is nothing more important, because it leads to your own happiness and life satisfaction.

## 8. Man in the Car Paradox

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.

This basically summarizes the chapter

There is a paradox here: 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.

It is not you they admire

The letter I wrote after my son was born said, “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.

## 9. Wealth is What You Don’t See

Singer Rihanna nearly went bankrupt after overspending and sued her financial advisor. The advisor responded: “Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?”³⁰
You can laugh, and please do. But the answer is, yes, people do need to be told that. 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.

Investor Bill Mann once wrote: “There is no faster way to feel rich than to spend lots of money on really nice things. But the way to be rich is to spend money you have, and to not spend money you don’t have. It’s really that simple.”
It is excellent advice, but it may not go far enough. The only way to be wealthy is to not spend the money that you do have. It’s not just the only way to accumulate wealth; it’s the very definition of wealth.

### Being 'rich' vs. being 'wealthy'

We should be careful to define the difference between wealthy and rich. It is more than semantics. Not knowing the difference is a source of countless poor money decisions.
Rich is a current income. Someone driving a $100,000 car is almost certainly rich, because even if they purchased the car with debt you need a certain level of income to afford the monthly payment. Same with those who live in big homes. 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. The danger here is that I think most people, deep down, want to be wealthy. They want freedom and flexibility, which is what financial assets not yet spent can give you. But it is so ingrained in us that to have money is to spend money that we don’t get to see the restraint it takes to actually be wealthy. And since we can’t see it, it’s hard to learn about it. Money has many ironies. Here’s an important one: Wealth is what you don’t see. 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.

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.

Wealth is what we don't see. The money not spent.

## 10. Save Money

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.

If you view building wealth as something that will require more money or big investment returns, you may become as pessimistic as the energy doomers were in the 1970s. The path forward looks hard and out of your control.

More importantly, the value of wealth is relative to what you need.

Everyone needs the basics. Once they’re covered there’s another level of comfortable basics, and past that there’s basics that are both comfortable, entertaining, and enlightening.
But spending beyond a pretty low level of materialism is mostly a reflection of ego approaching income, a way to spend money to show people that you have (or had) money.

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.

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.

And you don’t need a specific reason to save.

saving does not require a goal of purchasing something specific.
You can save just for saving’s sake. And indeed you should. Everyone should.

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.

Intelligence is not a reliable advantage in a world that’s become as connected as ours has.
But flexibility is.

Having more control over your time and options is becoming one of the most valuable currencies in the world.
That’s why more people can, and more people should, save money.

Save money. It offers freedom.

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.

Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more.

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

So people’s ability to save is more in their control than they might think.

Only saving for a specific goal makes sense in a predictable world. But ours isn’t. Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.

Savings without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce. It gives you time to think. It lets you change course on your own terms.

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.

When you don’t have control over your time, you’re forced to accept whatever bad luck is thrown your way. But if you have flexibility you have the time to wait for no-brainer opportunities to fall in your lap. This is a hidden return on your savings.

If you have flexibility you can wait for good opportunities, both in your career and for your investments. You’ll have a better chance of being able to learn a new skill when it’s necessary. You’ll feel less urgency to chase competitors who can do things you can’t, and have more leeway to find your passion and your niche at your own pace. 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.

## 11. Reasonable > Rational

You’re not a spreadsheet. You’re a person. A screwed up, emotional person.

Do not aim to be coldly rational when making financial decisions. 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.

Academic finance is devoted to finding the mathematically optimal investment strategies. My own theory is that, in the real world, people do not want the mathematically optimal strategy. They want the strategy that maximizes for how well they sleep at night.

There are few financial variables more correlated to performance than commitment to a strategy during its lean years—both the amount of performance and the odds of capturing it over a given period of time. The historical odds of making money in U.S. markets are 50/50 over one-day periods, 68% in one-year periods, 88% in 10-year periods, and (so far) 100% in 20-year periods. Anything that keeps you in the game has a quantifiable advantage.

Stay in the game.

Being rational is hard for a human. Instead, try to be reasonable - then you'll stick to your plan

Invest in a promising company you don’t care about, and you might enjoy it when everything’s going well. But when the tide inevitably turns you’re suddenly losing money on something you’re not interested in. It’s a double burden, and the path of least resistance is to move onto something else. If you’re passionate about the company to begin with—you love the mission, the product, the team, the science, whatever—the inevitable down times when you’re losing money or the company needs help are blunted by the fact that at least you feel like you’re part of something meaningful. That can be the necessary motivation that prevents you from giving up and moving on.

## 12. Surprise!

A trap many investors fall into is what I call “historians as prophets” fallacy: An overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress.
You can’t blame investors for doing this. If you view investing as a hard science, history should be a perfect guide to the future. Geologists can look at a billion years of historical data and form models of how the earth behaves. So can meteorologists. And doctors—kidneys operate the same way in 2020 as they did in 1020.

Two dangerous things happen when you rely too heavily on investment history as a guide to what’s going to happen next.

1. You’ll likely miss the outlier events that move the needle the most.

Nassim Taleb writes in his book Fooled By Randomness:
In Pharaonic Egypt … scribes tracked the high-water mark of the Nile and used it as an estimate for a future worst-case scenario. The same can be seen in the Fukushima nuclear reactor, which experienced a catastrophic failure in 2011 when a tsunami struck. It had been built to withstand the worst past historical earthquake, with the builders not imagining much worse—and not thinking that the worst past event had to be a surprise, as it had no precedent.

At a 2017 dinner I attended in New York, Daniel Kahneman was asked how investors should respond when our forecasts are wrong. He said:
Whenever we are surprised by something, even if we admit that we made a mistake, we say, ‘Oh I’ll never make that mistake again.’ But, in fact, what you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising.

2. History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes that are relevant to today’s world.

Stanford professor Scott Sagan once said something everyone who follows the economy or investment markets should hang on their wall: “Things that have never happened before happen all the time.”

But investing is not a hard science. It’s a massive group of people making imperfect decisions with limited information about things that will have a massive impact on their wellbeing, which can make even smart people nervous, greedy and paranoid.

The problem is that we often use events like the Great Depression and World War II to guide our views of things like worst-case scenarios when thinking about future investment returns. But those record-setting events had no precedent when they occurred. So the forecaster who assumes the worst (and best) events of the past will match the worst (and best) events of the future is not following history; they’re accidentally assuming that the history of unprecedented events doesn’t apply to the future.

The correct lesson to learn from surprises is that the world is surprising. Not that we should use past surprises as a guide to future boundaries; that we should use past surprises as an admission that we have no idea what might happen next.

The Intelligent Investor is one of the greatest investing books of all time. But I don’t know a single investor who has done well implementing Graham’s published formulas. The book is full of wisdom—perhaps more than any other investment book ever published. But as a how-to guide, it’s questionable at best.

But he was practical. And he was a true contrarian. He wasn’t so wedded to investing ideas that he’d stick with them when too many other investors caught onto those theories, making them so popular as to render their potential useless

There’s a common phrase in investing, usually used mockingly, that “It’s different this time.” If you need to rebut someone who’s predicting the future won’t perfectly mirror the past, say, “Oh, so you think it’s different this time?” and drop the mic. It comes from investor John Templeton’s view that “The four most dangerous words in investing are, ‘it’s different this time.’”

Templeton, though, admitted that it is different at least 20% of the time. The world changes. Of course it does. And those changes are what matter most over time. Michael Batnick put it: “The twelve most dangerous words in investing are, ‘The four most dangerous words in investing are, ‘it’s different this time.’”

That doesn’t mean we should ignore history when thinking about money. But there’s an important nuance: The further back in history you look, the more general your takeaways should be. General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tend to be stable in time. The history of money is useful for that kind of stuff.

The world is full of surprises. We can't analyze history and think that nothing different will ever happen. Especially in investing. There are so many moving cogs in economics. So many investors, who are unpredictable, because they have feelings. You can't predict what will happen.

## 13. Room for Error

If there’s one way to guard against their damage, it’s avoiding single points of failure.
A good rule of thumb for a lot of things in life is that everything that can break will eventually break. So if many things rely on one thing working, and that thing breaks, you are counting the days to catastrophe. That’s a single point of failure.

You have to give yourself room for error. You have to plan on your plan not going according to plan.

Benjamin Graham is known for his concept of margin of safety. He wrote about it extensively and in mathematical detail. But my favorite summary of the theory came when he mentioned in an interview that “the purpose of the margin of safety is to render the forecast unnecessary.”

Margin of safety—you can also call it room for error or redundancy—is the only effective way to safely navigate a world that is governed by odds, not certainties. And almost everything related to money exists in that kind of world.

Two things cause us to avoid room for error. One is the idea that somebody must know what the future holds, driven by the uncomfortable feeling that comes from admitting the opposite. The second is that you’re therefore doing yourself harm by not taking actions that fully exploit an accurate view of that future coming true.

But room for error is underappreciated and misunderstood. It’s often viewed as a conservative hedge, used by those who don’t want to take much risk or aren’t confident in their views. But when used appropriately, it’s quite the opposite.

Room for error lets you endure a range of potential outcomes, and endurance lets you stick around long enough to let the odds of benefiting from a low-probability outcome fall in your favor. 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 (cash) to let them endure hardship in another (stocks) has an edge over the person who gets wiped out, game over, insert more tokens, when they’re wrong.

Bill Gates understood this well. When Microsoft was a young company, he said he “came up with this incredibly conservative approach that I wanted to have enough money in the bank to pay a year’s worth of payroll even if we didn’t get any payments coming in.” Warren Buffett expressed a similar idea when he told Berkshire Hathaway shareholders in 2008: “I have pledged—to you, the rating agencies and myself—to always run Berkshire with more than ample cash ... When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.”

### Where to think about room for error

Another is saving for retirement. We can look at history and see, for example, that the U.S. stock market has returned an annual average of 6.8% after inflation since the 1870s. It’s a reasonable first approximation to use that as an estimate of what to expect on your own diversified portfolio when saving for retirement. You can use those return assumptions to back into the amount of money you’ll need to save each month to achieve your target nestegg.

### What Housel does

The solution is simple: Use room for error when estimating your future returns. This is more art than science. For my own investments, which I’ll describe more in chapter 20, I assume the future returns I’ll earn in my lifetime will be ⅓ lower than the historic average. So I save more than I would if I assumed the future will resemble the past. It’s my margin of safety. The future may be worse than ⅓ lower than the past, but no margin of safety offers a 100% guarantee. A one-third buffer is enough to allow me to sleep well at night. And if the future does resemble the past, I’ll be pleasantly surprised. “The best way to achieve felicity is to aim low,” says Charlie Munger. Wonderful.

An important cousin of room for error is what I call optimism bias in risk-taking, or “Russian roulette should statistically work” syndrome: An attachment to favorable odds when the downside is unacceptable in any circumstances.

Nassim Taleb says, “You can be risk loving and yet completely averse to ruin.” And indeed, you should.

You can love risks but afraid of ruin. Never let anything ruin you. Not in wealth or in anything else

The idea is that you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking. The odds are in your favor when playing Russian roulette. But the downside is not worth the potential upside. There is no margin of safety that can compensate for the risk.

To get around this, I think of my own money as barbelled. I take risks with one portion and am terrified with the other. This is not inconsistent, but the psychology of money would lead you to believe that it is. I just want to ensure I can remain standing long enough for my risks to pay off. You have to survive to succeed. To repeat a point we’ve made a few times in this book: The ability to do what you want, when you want, for as long as you want, has an infinite ROI.

The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.

The trick that often goes overlooked—even by the wealthiest—is what we saw in chapter 10: realizing that you don’t need a specific reason to save. It’s fine to save for a car, or a home, or for retirement. But it’s equally important to save for things you can’t possibly predict or even comprehend

Predicting what you’ll use your savings for assumes you live in a world where you know exactly what your future expenses will be, which no one does. I save a lot, and I have no idea what I’ll use the savings for in the future. Few financial plans that only prepare for known risks have enough margin of safety to survive the real world.

In fact, the most important part of every plan is planning on your plan not going according to plan.

This mostly summarizes the chapter.

Make room for error.

## 14. You’ll Change

Embracing the idea that financial goals made when you were a different person should be abandoned without mercy versus put on life support and dragged on can be a good strategy to minimize future regret.
The quicker it’s done, the sooner you can get back to compounding.

Chapter summary:

Assume that you'll change later in life and plan accordingly. Aim for balance, not either end of the extremes. Then you can adjust.

Avoid sunk cost - be willing to start over if something is not working for you.

Long-term financial planning is essential. But things change—both the world around you, and your own goals and desires. It is one thing to say, “We don’t know what the future holds.” It’s another to admit that you, yourself, don’t know today what you will even want in the future. And the truth is, few of us do. It’s hard to make enduring long-term decisions when your view of what you’ll want in the future is likely to shift.

The End of History Illusion is what psychologists call the tendency for people to be keenly aware of how much they’ve changed in the past, but to underestimate how much their personalities, desires, and goals are likely to change in the future

“All of us,” he said, “are walking around with an illusion—an illusion that history, our personal history, has just come to an end, that we have just recently become the people that we were always meant to be and will be for the rest of our lives.” We tend to never learn this lesson.

Harvard psychologist Daniel Gilbert said the above

You can see how this can impact a long-term financial plan. Charlie Munger says the first rule of compounding is to never interrupt it unnecessarily

Part of the reason people like Ronald Read—the wealthy janitor we met earlier in the book—and Warren Buffett become so successful is because they kept doing the same thing for decades on end, letting compounding run wild.

But many of us evolve so much over a lifetime that we don’t want to keep doing the same thing for decades on end

We can't assume that we'll have the same desires later in life

We should avoid the extreme ends of financial planning. Assuming you’ll be happy with a very low income, or choosing to work endless hours in pursuit of a high one, increases the odds that you’ll one day find yourself at a point of regret. The fuel of the End of History Illusion is that people adapt to most circumstances, so the benefits of an extreme plan—the simplicity of having hardly anything, or the thrill of having almost everything—wear off. But the downsides of those extremes—not being able to afford retirement, or looking back at a life spent devoted to chasing dollars—become enduring regrets. Regrets are especially painful when you abandon a previous plan and feel like you have to run in the other direction twice as fast to make up for lost time.

Compounding works best when you can give a plan years or decades to grow. This is true for not only savings but careers and relationships. Endurance is key. And when you consider our tendency to change who we are over time, balance at every point in your life becomes a strategy to avoid future regret and encourage endurance.

We should also come to accept the reality of changing our minds. Some of the most miserable workers I’ve met are people who stay loyal to a career only because it’s the field they picked when deciding on a college major at age 18. When you accept the End of History Illusion, you realize that the odds of picking a job when you’re not old enough to drink that you will still enjoy when you’re old enough to qualify for Social Security are low.

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.

## 15. Nothing’s Free

Everything has a price, and the key to a lot of things with money is just figuring out what that price is and being willing to pay it.
The problem is that the price of a lot of things is not obvious until you’ve experienced them firsthand, when the bill is overdue.

Most things are harder in practice than they are in theory. Sometimes this is because we’re overconfident. More often it’s because we’re not good at identifying what the price of success is, which prevents us from being able to pay it.

The S&P 500 increased 119-fold in the 50 years ending 2018. All you had to do was sit back and let your money compound. But, of course, successful investing looks easy when you’re not the one doing it.
“Hold stocks for the long run,” you’ll hear. It’s good advice.
But do you know how hard it is to maintain a long-term outlook when stocks are collapsing?

Now here’s the important part. Like the car, you have a few options: You can pay this price, accepting volatility and upheaval. Or you can find an asset with less uncertainty and a lower payoff, the equivalent of a used car. Or you can attempt the equivalent of grand-theft auto: Try to get the return while avoiding the volatility that comes along with it.
Many people in investing choose the third option. Like a car thief—though well-meaning and law-abiding—they form tricks and strategies to get the return without paying the price. They trade in and out. They attempt to sell before the next recession and buy before the next boom. Most investors with even a little experience know that volatility is real and common. Many then take what seems like the next logical step: trying to avoid it.

Investing is volatile. More often than not, something is trading at least 5% below it's all time high. So what do we do?

The question is: Why do so many people who are willing to pay the price of cars, houses, food, and vacations try so hard to avoid paying the price of good investment returns?
The answer is simple: The price of investing success is not immediately obvious. It’s not a price tag you can see, so when the bill comes due it doesn’t feel like a fee for getting something good. It feels like a fine for doing something wrong. And while people are generally fine with paying fees, fines are supposed to be avoided. You’re supposed to make decisions that preempt and avoid fines. Traffic fines and IRS fines mean you did something wrong and deserve to be punished. The natural response for anyone who watches their wealth decline and views that drop as a fine is to avoid future fines.

It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor.
Few investors have the disposition to say, “I’m actually fine if I lose 20% of my money.” This is doubly true for new investors who have never experienced a 20% decline.
But if you view volatility as a fee, things look different.

The trick is convincing yourself that the market’s fee is worth it. That’s the only way to properly deal with volatility and uncertainty—not just putting up with it, but realizing that it’s an admission fee worth paying.
There’s no guarantee that it will be. Sometimes it rains at Disneyland.
But if you view the admission fee as a fine, you’ll never enjoy the magic.
Find the price, then pay it.

There are costs that don't have labels. If we want what they can give, we have to find the price and pay it.

There's no getting around paying for it - the bill will come someday.

Volatility in investing should be seen as a fee - it's just the price you pay for future returns. Keep your money in the market. Hold long term.

Every job looks easy when you’re not the one doing it because the challenges faced by someone in the arena are often invisible to those in the crowd.

Say you want a new car. It costs $30,000. You have three options: 1) Pay$30,000 for it, 2) find a cheaper used one, or 3) steal it. In this case, 99% of people know to avoid the third option, because the consequences of stealing a car outweigh the upside.

Here, we know the price

Market returns are never free and never will be. They demand you pay a price, like any other product. You’re not forced to pay this fee, just like you’re not forced to go to Disneyland. You can go to the local county fair where tickets might be \$10, or stay home for free. You might still have a good time. But you’ll usually get what you pay for. Same with markets. The volatility/uncertainty fee—the price of returns—is the cost of admission to get returns greater than low-fee parks like cash and bonds.

## 16. You & Me

I don’t think we’ll ever be able to fully explain why bubbles occur. It’s like asking why wars occur—there are almost always several reasons, many of them conflicting, all of them controversial.
It’s too complicated a subject for simple answers.
But let me propose one reason they happen that both goes overlooked and applies to you personally: Investors often innocently take cues from other investors who are playing a different game than they are.

An idea exists in finance that seems innocent but has done incalculable damage.
It’s the notion that assets have one rational price in a world where investors have different goals and time horizons.
The answer depends on who “you” are.

When a commentator on CNBC says, “You should buy this stock,” keep in mind that they do not know who you are. Are you a teenager trading for fun? An elderly widow on a limited budget? A hedge fund manager trying to shore up your books before the quarter ends? Are we supposed to think those three people have the same priorities, and that whatever level a particular stock is trading at is right for all three of them?
It’s crazy.

A takeaway here is that 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.

The main thing I can recommend is going out of your way to identify what game you’re playing.

It’s surprising how few of us do. We call everyone investing money “investors” like they’re basketball players, all playing the same game with the same rules. When you realize how wrong that notion is you see how vital it is to simply identify what game you’re playing

## 17. The Seduction of Pessimism

Optimism is the best bet for most people because the world tends to get better for most people most of the time.
But pessimism holds a special place in our hearts. Pessimism isn’t just more common than optimism. It also sounds smarter. It’s intellectually captivating, and it’s paid more attention than optimism, which is often viewed as being oblivious to risk.

This same thing applies to business, where it takes years to realize how important a product or company is, but failures can happen overnight.
And in stock markets, where a 40% decline that takes place in six months will draw congressional investigations, but a 140% gain that takes place over six years can go virtually unnoticed.
And in careers, where reputations take a lifetime to build and a single email to destroy.

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.
Maybe that’s why it’s so seductive. Expecting things to be bad is the best way to be pleasantly surprised when they’re not.
Which, ironically, is something to be optimistic about.

Things aren't as bad as they seem.

Pessimism is more alluring than optimism. But it isn't necessarily more true.

Before we go further we should define what optimism is. Real optimists don’t believe that everything will be great. That’s complacency. 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. The simple idea that most people wake up in the morning trying to make things a little better and more productive than wake up looking to cause trouble is the foundation of optimism. It’s not complicated. It’s not guaranteed, either. It’s just the most reasonable bet for most people, most of the time. The late statistician Hans Rosling put it differently: “I am not an optimist. I am a very serious possibilist.”

The interesting thing about Panarin-type stories is that their polar opposite—forecasts of outrageous optimism—are rarely taken as seriously as prophets of doom.

Optimism is never taken as serious as pessimism.

Pessimism just sounds smarter and more plausible than optimism.

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.

“Every group of people I ask thinks the world is more frightening, more violent, and more hopeless—in short, more dramatic—than it really is,” Hans Rosling wrote in his book Factfulness

The intellectual allure of pessimism has been known for ages. John Stuart Mill wrote in the 1840s: “I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.”

Even if you don’t own stocks, those kind of things will grab your attention. Only 2.5% of Americans owned stocks on the eve of the great crash of 1929 that sparked the Great Depression. But the majority of Americans—if not the world—watched in amazement as the market collapsed, wondering what it signaled about their own fate. This was true whether you were a lawyer or a farmer or a car mechanic.

There are two topics that will affect your life whether you are interested in them or not: money and health. While health issues tend to be individual, money issues are more systemic. In a connected system where one person’s decisions can affect everyone else, it’s understandable why financial risks gain a spotlight and capture attention in a way few other topics can.

Assuming that something ugly will stay ugly is an easy forecast to make. And it’s persuasive, because it doesn’t require imagining the world changing. But problems correct and people adapt. Threats incentivize solutions in equal magnitude. That’s a common plot of economic history that is too easily forgotten by pessimists who forecast in straight lines.

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.

But since that progress happened so slowly, it captures less attention than quick, sudden losses like terrorism, plane crashes, or natural disasters

The short sting of pessimism prevails while the powerful pull of optimism goes unnoticed.

This underscores an important point made previously in this book: In investing you must identify the price of success—volatility and loss amid the long backdrop of growth—and be willing to pay it.

## 18. When You’ll Believe Anything

In 2007, we told a story about the stability of housing prices, the prudence of bankers, and the ability of financial markets to accurately price risk.
In 2009 we stopped believing that story.
That’s the only thing that changed. But it made all the difference in the world.

There are many things in life that we think are true because we desperately want them to be true.
I call these things “appealing fictions.” They have a big impact on how we think about money—particularly investments and the economy.
An appealing fiction happens when you are smart, you want to find solutions, but face a combination of limited control and high stakes.
They are extremely powerful. They can make you believe just about anything.

This is a big part of why room for error, flexibility, and financial independence—important themes discussed in previous chapters—are indispensable.
The bigger the gap between what you want to be true and what you need to be true to have an acceptable outcome, the more you are protecting yourself from falling victim to an appealing financial fiction.

2. Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.

Just like my daughter, I don’t know what I don’t know. So I am just as susceptible to explaining the world through the limited set of mental models I have at my disposal.
Like her, I look for the most understandable causes in everything I come across. And, like her, I’m wrong about a lot of them, because I know a lot less about how the world works than I think I do.

Daniel Kahneman once told me about the stories people tell themselves to make sense of the past. He said:
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.

Kahneman once laid out the path these stories take:
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.
Both in explaining the past and in predicting the future, we focus on the causal role of skill and neglect the role of luck.
We focus on what we know and neglect what we do not know, which makes us overly confident in our beliefs.

Other than clinging to a new narrative, we had an identical—if not greater—capacity for wealth and growth in 2009 as we did in 2007. Yet the economy suffered its worst hit in 80 years.

1. 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.

Why do people listen to TV investment commentary that has little track record of success? Partly because the stakes are so high in investing. Get a few stock picks right and you can become rich without much effort. If there’s a 1% chance that someone’s prediction will come true, and it coming true will change your life, it’s not crazy to pay attention—just in case.

And 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.

These may be low-probability bets. The problem is that viewers can’t, or don’t, calibrate low odds, like a 1% chance. Many default to a firm belief that what they want to be true is unequivocally true. But they’re only doing that because the possibility of a huge outcome exists.

If you think a recession is coming and you cash out your stocks in anticipation, your view of the economy is suddenly going to be warped by what you want to happen. Every blip, every anecdote, will look like a sign that doom has arrived—maybe not because it has, but because you want it to.

Most people, when confronted with something they don’t understand, do not realize they don’t understand it because they’re able to come up with an explanation that makes sense based on their own unique perspective and experiences in the world, however limited those experiences are. We all want the complicated world we live in to make sense. So we tell ourselves stories to fill in the gaps of what are effectively blind spots.

We don’t wander around blind and confused. We have to think the world we operate in makes sense based on what we happen to know. It’d be too hard to get out of bed in the morning if you felt otherwise.

We all think we know what's going on. We tell ourselves stories to match our beliefs. Where there are gaps in our knowledge, we fill in stories. The reality is that we don't know what we don't know.

We can be so confident that we are right, but nevertheless be very wrong.

## 19. All Together Now

That last line is important. “Medicine is a complex profession and the interactions between physicians and patients are also complex.”
You know what profession is the same? Financial advice.
I can’t tell you what to do with your money, because I don’t know you.
I don’t know what you want. I don’t know when you want it. I don’t know why you want it.
So I’m not going to tell you what to do with your money.

There are universal truths in money, even if people come to different conclusions about how they want to apply those truths to their own finances.

Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong. Because it’s never as good or as bad as it looks. The world is big and complex. 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.

Less ego, more wealth. Saving money is the gap between your ego and your income, and wealth is what you don’t see. So wealth is created by suppressing what you could buy today in order to have more stuff or more options in the future. 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.

## 20. Confessions

This chapter is about what Morgan does with his finances.

What works for one person may not work for another.
You have to find what works for you. Here’s what works for me.

We also keep a higher percentage of our assets in cash than most financial advisors would recommend—something around 20% of our assets outside the value of our house. This is also close to indefensible on paper, and I’m not recommending it to others. It’s just what works for us.
We do it because cash is the oxygen of independence, and—more importantly—we never want to be forced to sell the stocks we own. We want the probability of facing a huge expense and needing to liquidate stocks to cover it to be as close to zero as possible. Perhaps we just have a lower risk tolerance than others.

Charlie Munger once said “I did not intend to get rich. I just wanted to get independent.”

We can leave aside rich, but independence has always been my personal financial goal

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.

If there’s a part of our household financial plan I’m proud of it’s that we got the goalpost of lifestyle desires to stop moving at a young age. Our savings rate is fairly high, but we rarely feel like we’re repressively frugal because our aspirations for more stuff haven’t moved much. It’s not that our aspirations are nonexistent—we like nice stuff and live comfortably. We just got the goalpost to stop moving.

Never wanting "the next thing" when you just got something

Independence is our top goal. A secondary benefit of maintaining a lifestyle below what you can afford is avoiding the psychological treadmill of keeping up with the Joneses. 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. Nassim Taleb explained: “True success is exiting some rat race to modulate one’s activities for peace of mind.” I like that.

I’m saving for a world where curveballs are more common than we expect. Not being forced to sell stocks to cover an expense also means we’re increasing the odds of letting the stocks we own compound for the longest period of time. Charlie Munger put it well: “The first rule of compounding is to never interrupt it unnecessarily.

now every stock we own is a low-cost index fund.

We invest money from every paycheck into these index funds—a combination of U.S. and international stocks. There’s no set goal—it’s just whatever is leftover after we spend. We max out retirement accounts in the same funds, and contribute to our kids’ 529 college savings plans.

And that’s about it. Effectively all of our net worth is a house, a checking account, and some Vanguard index funds.