What's The Book About?
Like the title suggests, the book uses different anecdotes and examples to describe how people think about money.
For example, why people end up taking too much risk, why people think they know more than they do, why people become greedy, why people let their ego get in the way of saving etc etc.
I think the book is good for an intermediate investor, but probably not for someone who is just starting out in their personal finance/investing journey.
There are some concepts discussed that would be easier to understand once you already have some (very elementary) investing experience.
However, I think everyone from intermediate to very experienced investors will gain value from the book. It drills in the fundamentals of frugality, prudence, risk management and basically reminds us that we're not that smart and should temper our risk taking.
Below are the key lessons I took from the book. Keep in mind these are the lessons I found relevant to me personally. There is a lot covered in the book that I haven't mentioned below, maybe because it's something I've already internalised and didn't need reminding of, or something that I just didn't find interesting or important. However, they might be interesting or important to you. Therefore, I still recommend you read the book fully so you don't miss anything!
Lesson: There Is Not One Size Fits All
Try to understand that everyone has a different attitude to money and that none of them are incorrect.
For example, if you grew up very poor, you will have a different mindset to someone who grew up rich. If you watched your parents lose all their money in the stock market crash, you will have a different risk tolerance and attitude towards stocks than someone whose father got very rich in stocks.
Some people have grown up in a time with no inflation. Some people have never lived in a time without inflation.
Everybody has experienced money in different ways.
"Your personal experiences with money make up maybe 0.0000001% of what's happened in the world, but 80% of how you think the world works."
The lesson here is you can't blindly follow other people, even if they are billionaires. You need to form your own plan on investing and wealth, because what you can tolerate and understand is going to be much different to everyone else.
Lesson: Don't Underestimate The Importance Of Luck
Risk and luck are cousins.
People like Zuckerberg, Gates, Bezos are championed because they worked hard and had a good idea and turned it into a success, but nobody talks about how much luck they experienced along the way.
The reality is there were people who were probably just as smart and hardworking as these men, and had just as good ideas, but failed just due to a stroke of bad luck, but we never take that into account. They're just failures.
The author uses Bill Gates as an example, where during the 70s when he was in high school, he literally had a one in a million chance of being at a high school with a computer system students could use. This is where he learned to program. To make things even "luckier", the computer system required you to pay a few cents for every hour you used it, but it just happened that Gates and his friend found a computer that had a glitch, where you could pay for one hour and use it for unlimited hours. The chance of this glitch happening at the computer at this school during the years Gates was a student at that particular school was also probably one in a million. And this is exactly how Gates got so much programming experience at such a young age (when literally 99% of other high school students didn't even have access to a computer). Gates himself has admitted - "If I hadn't gone to Lakeside High School, there would be no Microsoft".
Don't rely on luck, but don't underestimate how much influence "luck" has on your investing success. For example, if one of your investment goes up by 100x, don't assume you're an elite stock picker and depend on it to happen again - there's a good chance you were just lucky.
A better way to put it - focus less on specific case studies, and more on broad and repeated patterns.
Lesson: It's Stupid To Compare Your Wealth To Others
Consider a rookie baseball player who earns $500,000 a year.
He is, by any definition, rich.
But say he plays on the same team as Mike Trout, who has a 12-year, $430 million contract.
By comparison, the rookie is broke.
But then think about Mike Trout.
Thirty-six million dollars per year is an insane amount of money.
But to make it on the list of the top-ten highest-paid hedge fund managers in 2018 you needed to earn at least $340 million in one year.
That’s who people like Trout might compare their incomes to.
And the hedge fund manager who makes $340 million per year compares himself to the top five hedge fund managers, who earned at least $770 million in 2018.
Those top managers can look ahead to people like Warren Buffett, whose personal fortune increased by $3.5 billion in 2018.
And someone like Buffett could look ahead to Jeff Bezos, whose net worth increased by $24 billion in 2018—a sum that equates to more per hour than the “rich” baseball player made in a full year.
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.
The lesson here is try to remember what's truly valuable - your freedom and independence, your family, your reputation, your happiness.
This means you shouldn't jeopardise these things for more money.
Understand when it's okay to stop taking on more risks to get "more", and be mindful of reaching the point when you have "enough".
If you're worth $100 million, there's nothing wrong with putting it in a bank account earning 1% interest (that's $1 million per year, by the way) and just enjoying life with your family.
Lesson: Compounding Is Supposed To Work Slowly
There have been five major ice ages, according to experts, meaning at least five times in history the earth was completely covered in ice.
Eventually a pair of Russian scientists figured it out.
Due to the changing gravitational pull of the sun and moon on each planet, the earth went through a period where it tilted a tiny fraction further from the sun.
This led to summers that were a tiny fraction cooler than before.
Which led to the ice caps melting a tiny fraction less than the year before.
With more ice, obviously the earth is a tiny fraction colder.
Which means during the winter, the ice caps freeze a tiny fraction more than before.
Which makes the earth colder still, which means the following summer, the ice caps melt even less.
Compound this over a million years, and the earth becomes covered in ice.
Then of course, once the cycle starts to reverse, and the gravitational pull of the sun changes to tilt the earth slightly closer, the summers get a tiny bit warmer, the ice caps start to melt a tiny bit more each year, and over a million years the ice caps are gone and the ice age is over.
You start with a thin layer of snow left over from a slightly cooler summer which nobody thinks twice about. Nobody realises that thin layer of snow is the start of a compounding machine that will eventually cover the entire planet in ice and destroy every living species on earth.
There are two lessons here. One - compounding will turn small contributions into a multi million dollar fortune over time.
But the second lesson is - you need time.
Warren Buffett might be the world's most successful investor, worth $84 billion. But he made most of his wealth after his 50th birthday, and he's currently 94 years old, and he bought his first stock when he was ten! Not to mention it took him until he was 30 (20 years of investing) to reach 1 million.
If he had been a more normal person, who started investing in his twenties, and then retired in his 60s to enjoy his grandkids, he wouldn't even be a billionaire. Based on his returns and investments, he'd be worth about $12 million today - about 99.9% less than he is currently.
Lesson: Getting Money And Keeping Money Require Different Skills
Getting money requires taking risk, being optimistic, and ambition.
Keeping money requires the opposite - humility, fear and frugality.
There is a reason Warren Buffett is currently sitting on $130 billion in cash - because his primary goal now is to protect the money he has and be careful, not take risks to make more money.
It requires accepting that some of your success was probably due to luck, and you cannot rely on that luck again to have success in the future.
Lesson: Survival Is The Secret
The number one requirement to success with money is not compounding or stock picking or dividends - it's survival.
Survival mindset is as follow:
- I want to be financially unbreakable. Rather than big returns, I want to focus on being around long enough for compounding to work wonders - and even mediocre returns are sufficient for that.
- Planning is important, but many plans won't work out. Plan your investments so "8% per year for 30 years would be great, but even I only get 2% per year, I'll still be okay."
- Balanced optimism and paranoia. Be optimistic that things will work out, but paranoid enough that you know things will go badly. Things don't need to perfect, the good just needs to outbalance the bad over time. This means even through wars, recessions, pandemics, over time, the economy will still grow and investments will still compound.
Lesson: Picking Winners Is Hard
Walt Disney made 400 cartoons which bombed before he made Snow White, which became a roaring success. That one film made $8 million in six months and was the start of Disney.
Venture Capital makes 50 investments, and expects half of them to fail, ten to have moderate success, and maybe one or two to be runaway successes.
In the Russell 3000 Index since 1980, it has returned 73x.
However, 40% of companies lost 70% of their value and never recovered.
Practically all of the indexes gains came from 7% of the companies.
What are the odds of you picking those 7%?
Two lessons here:
1. During the rare moments when everyone is going crazy, can you keep a cool head and "just keep investing?"
2. When everyone is trying to pick the next hot stock, are you able to keep a cool heading and "just keep indexing?"
Lots and lots of things break, and it's unlikely you will only choose the ones that don't, whether it's which month you should pick and choose to invest, or which stocks you should pick and choose to invest.
Warren Buffett once said he's owned 500+ stocks during his life, but he made most of his money on ten of them. If you removed just a few of his top investments, his long-term track record is completely average.
Lesson: The Goal Is Not Wealth, It's Freedom
"Derek Sivers, a successful entrepreneur, once wrote about a friend who asked him to tell the story about how he got rich:
I had a day job in midtown Manhattan paying $20k per year — about minimum wage ... I never ate out, and never took a taxi.
My cost of living was about $1000/month, and I was earning $1800/month. I did this for two years, and saved up $12,000. I was 22 years old.
Once I had $12,000 I could quit my job and become a full-time musician. I knew I could get a few gigs per month to pay my cost of living. So I was free. I quit my job a month later, and never had a job again.
When I finished telling my friend this story, he asked for more. I said no, that was it. He said, “No, what about when you sold your company?”
I said no, that didn’t make a big difference in my life. That was just more money in the bank. The difference happened when I was 22."
The point is - the USA is the richest nation in the history of our species, and its people are the most unhappy they've ever been.
The goal is to have freedom over how you spend your time - the money is just the tool to get there.
Lesson: Wealth Is About How Much Money You Don't Spend
Wealth is not the same as money.
If you see a man in a $100,000 car, he might be wealthy. But he's probably not. In fact, the only data point you have about him is he's got $100,000 less in his bank account than he did before.
"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."
The accumulation of wealth is not about how much money you make, but how much money you keep and grow over time.
Literally the only way to get wealthy is to not spend the money you have. This is not only how to accumulate wealth, it's the definition of wealth - having a lot of unspent money.
Lesson: Always Be Saving
When people think of saving, they often think of "saving for a house" or "saving for a car".
But what about "just saving?"
Saving for no reason is the best type of saving, because it means you don't need to spend that money later.
You are simply saving to accumulate, and these savings will compound, and wealth will be built.
Don't only save when you are saving "for something", the best type of saving is when you are saving "for nothing".
Remember - your wealth is going to depend on the amount of money you don't spend.
Lesson: Reasonable Is Better Than Rational
In 2008 a pair of researchers from Yale published a study arguing young savers should supercharge their retirement accounts using two-to-one margin (two dollars of debt for every dollar of their own money) when buying stocks.
It suggests investors taper that leverage as they age, which lets a saver take more risk when they’re young and can handle a magnified market rollercoaster, and less when they’re older.
Even if using leverage left you wiped out when you were young (if you use two-to-one margin a 50% market drop leaves you with nothing) the researchers showed savers would still be better off in the long run so long as they picked themselves back up, followed the plan, and kept saving in a two-to-one leveraged account the day after being wiped out.
The math works on paper. It’s a rational strategy.
But it’s almost absurdly unreasonable.
No normal person could watch 100% of their retirement account evaporate and be so unphased that they carry on with the strategy undeterred. They’d quit, look for a different option, and perhaps sue their financial advisor.
You know yourself and your tolerance levels better than anyone else.
Choose an investment strategy that you know you can sleep with at night, and you know you can realistically stick with.
Saving 70% of your income might be a rational way to retire early, but there's a good chance you're simply not disciplined enough to do it.
The historical odds of making money in the US market is 50/50 over one-day periods, 68% over one-year periods, 88% over ten-year periods and 100% over 20-year periods.
Anything that keeps you in the game will give you a quantifiable advantage.
Anything that pushes you towards a 20-year investing period will push you towards a 100% success rate.
Lesson: Surprises Happen
Stanford professor Scott Sagan once said:
"Things that have never happened before happen all the time."
History is mostly the study of "surprising" events that nobody thought would happen.
But then we use history as a way to predict the future.
Do you see the irony?
Whenever we are surprised by something, we say, "Oh, I'll never make that mistake again".
But that is the incorrect lesson.
The correct lesson to learn from surprises is that the world is surprising. Rather than use past surprises as a way to predict future events, use them as an admission that we have no idea what might happen next.
This is where margin of safety becomes essential.
Don't stretch yourself to the limit.
Always leave breathing room.
If you've put half your money in very high risk assets, be overly terrified and careful with the other half.
Even a 95% chance of upside is never worth it if the 5% downside is being wiped out.
Lesson: The "Right" Price Is Different For Everyone
What is a rational price to pay for a stock?
The answer depends on who you are.
Someone with a 30 year time horizon will have a different reasonable price to someone with a 10 year time horizon to someone who is a day trader.
All of them will need to look at different metrics and each metric will have different relevance.
You might see a really intelligent investor paying $100 per share for a stock at 50x earnings and wonder what you're missing - the answer is you're missing the fact that he is playing a different game to you.
However, you don't know the game, so don't try to copy him!
Everyone's goals are different, so everyone's price is different.
Think of investors like athletes - all of them need to train differently, get good at different things, be strong and fit in different ways - it's the same with investors!
Lesson: Pessimism Sells (But Is Usually Wrong)
Optimism is the best bet for most people because the world tends to get better over time.
The majority of people do not wake up and say, "Let me see how I can make my life worse today."
Most people are always trying to make their lives better, whether it's make more money, grow their business, get healthier, solve problems etc.
Therefore, if 95% of people are trying to move the world forward, logic says the world will move forward.
Optimism doesn't ignore risk, it simply means you believe the odds of a good outcome are better than the odds of a bad outcome over time.
There will always be stories about how the world is ending, the economy is collapsing, countries are collapsing etc, and these stories are always front page because they sell.
However, nobody wants to publish the "boring" story of the world will probably continue to slowly get better over time in small increments, even though that's the most probable outcome.
Part of the reason is progress is slow and constant and hard to notice, but setbacks often happen quickly and dramatically.
Remember - even during setbacks, most people's lives don't change that much. Sure some people lose their jobs and get worse jobs. Some people might eat less restaurant dinners. But overall during a recession, most people continue to live in the same house, driving the same car, working the same job, eating the same food, going to the same gym, hanging out with the same friends. However, the "story" that is peddled in the news and media changes. "The economy is crashing! Stocks are down 70%! The trade surplus is the lowest in 40 years! OMGGGG!!"
But the reality is, life is the same for most people.
The pessimistic story sells, but it doesn't reflect reality.
Don't be influenced by the story over reality!
Lesson: Understand How Much You Don't Understand
Everyone has an incomplete view of the world, but we form a complete narrative to fill in the gaps.
We tend to look for the most understandable causes for everything we come across, but we are wrong about a lot of them, because we know a lot less about the world than we think we do.
We like to study history because it gives us the illusion that the world is understandable when it's not - this leads to mistakes.
Forecasting stocks and anything else is hard because you are the only person in the world who sees the world the way you do.
That means your explanation of the world may only make sense to you, and not the other millions of investors buying the same stocks as you.
Come to terms with how much you don't know, and to do that you need to accept how much of the world you can't control.