The Psychology of Money

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• Author: Morgan Housel

Highlights

A genius is the man who can do the average thing when everyone else around him is losing his mind.” —Napoleon — location: 51

as a valet at a nice hotel in Los Angeles. One frequent guest was a technology executive. He was a genius, having designed and patented a key component in Wi-Fi routers in his 20s. He had started and sold several companies. He was wildly — location: 58

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 — location: 1420

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. — location: 1433

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. — location: 1439

The 401(k) is 42 years old. The Roth IRA is younger, created in the 1990s. So personal financial advice and analysis about how Americans save for retirement today is not directly comparable to what made sense just a generation ago — location: 1442

The average time between recessions has grown from about two years in the late 1800s to five years in the early 20th century to eight years over the last half-century. — location: 1455

As I write this it looks like we’re going into recession—12 years since the last recession began in December 2007. That’s the longest gap between recessions since before the Civil War. — location: 1456

There are plenty of theories on why recessions have become less frequent. One is that the Fed is better at managing the business cycle, or at least extending it. Another is that heavy industry is more prone to boom-and-bust overproduction than the service industries that dominated the last 50 years. The pessimistic view is that we now have fewer recessions, but when they occur they are more powerful than before — location: 1458

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. — location: 1472

Graham was constantly experimenting and retesting his assumptions and seeking out what works—not what worked yesterday but what works today. In each revised edition of The Intelligent Investor, Graham discarded the formulas he presented in the previous edition and replaced them with new ones, declaring, in a sense, that “those do not work anymore, or they do not work as well as they used to; these are the formulas that seem to work better now.” — location: 1478

Just before he died Graham was asked whether detailed analysis of individual stocks—a tactic he became famous for—remained a strategy he favored. He answered:   In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook was first published. But the situation has changed a great deal since then. — location: 1486

What changed was: Competition grew as opportunities became well known; technology made information more accessible; and industries changed as the economy shifted from industrial to technology sectors, which have different business cycles and capital uses. Things changed. — location: 1490

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. — location: 1501

What matters is that a blackjack card counter knows they are playing a game of odds, not certainties. In any particular hand they think they have a good chance of being right, but know there’s a decent chance they’re wrong. — location: 1523

There is never a moment when you’re so right that you can bet every chip in front of you. The world isn’t that kind to anyone—not consistently, anyways. You have to give yourself room for error. You have to plan on your plan not going according to plan. — location: 1528

You have to give yourself room for error. You have to plan on your plan not going according to plan. — location: 1529

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.” — location: 1540

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. — location: 1543

Graham’s margin of safety is a simple suggestion that we don’t need to view the world in front of us as black or white, predictable or a crapshoot. The grey area—pursuing things where a range of potential outcomes are acceptable—is the smart way to proceed — location: 1548

We do this in all kinds of financial endeavors, especially those related to our own decisions. Harvard psychologist Max Bazerman once showed that when analyzing other people’s home renovation plans, most people estimate the project will run between 25% and 50% over budget.⁴³ But when it comes to their own projects, people estimate that renovations will be completed on time and at budget. Oh, the eventual disappointment. — location: 1553

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. — location: 1561

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. — location: 1562

There are a few specific places for investors to think about room for error. One is volatility — location: 1569

Spreadsheets are good at telling you when the numbers do or don’t add up. They’re not good at modeling how you’ll feel when you tuck your kids in at night wondering if the investment decisions you’ve made were a mistake that will hurt their future. — location: 1573

Having a gap between what you can technically endure versus what’s emotionally possible is an overlooked version of room for error. — location: 1574

The solution is simple: Use room for error when estimating your future returns — location: 1583

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. — location: 1584

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. — location: 1586

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. — location: 1587

Nassim Taleb says, “You can be risk loving and yet completely averse to ruin — location: 1591

The idea is that you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking. — location: 1592

And if the cost of the downside is ruin, the upside the other 95% of the time likely isn’t worth the risk, no matter how appealing it looks — location: 1596

Leverage is the devil here. Leverage—taking on debt to make your money go further—pushes routine risks into something capable of producing ruin. — location: 1597

But those with high leverage had a double wipeout: Not only were they left broke, but being wiped out erased every opportunity to get back in the game at the very moment opportunity was ripe. — location: 1600

I just want to ensure I can remain standing long enough for my risks to pay off. You have to survive to succeed. — location: 1604

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 — location: 1605

Room for error does more than just widen the target around what you think might happen. It also helps protect you from things you’d never imagine, which can be the most troublesome events we face. — location: 1607

You can plan for every risk except the things that are too crazy to cross your mind. And those crazy things can do the most harm, because they happen more often than you think and you have no plan for how to deal with them. — location: 1617

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. — location: 1633

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. — location: 1638

The trick that often goes overlooked—even by the wealthiest — location: 1640

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—the financial — location: 1641

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— — location: 1641

In fact, the most important part of every plan is planning on your plan not going according to plan. — location: 1645

Imagining a goal is easy and fun. Imagining a goal in the context of the realistic life stresses that grow with competitive pursuits is something entirely different. This has a big impact on our ability to plan for future financial goals. — location: 1666

Long-term financial planning is essential. But things change—both the world around you, and your own goals and desires — location: 1680

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 — location: 1680

It’s hard to make enduring long-term decisions when your view of what you’ll want in the future is likely to shift. — location: 1682

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. — location: 1683

At every stage of our lives we make decisions that will profoundly influence the lives of the people we’re going to become, and then when we become those people, we’re not always thrilled with the decisions we made. — location: 1685

“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.” — location: 1689

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. — location: 1692

But how do you not interrupt a money plan—careers, investments, spending, budgeting, whatever—when what you want out of life changes? It’s hard — location: 1693

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 — location: 1694

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. — location: 1696

I know young people who purposefully live austere lives with little income, and they’re perfectly happy with it. Then there are those who work their tails off to pay for a life of luxury, and they’re perfectly happy with that. Both have risks—the former risks being unprepared to raise a family or fund retirement, the latter risks regret that you spent your youthful and healthy years in a cubicle. — location: 1697

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. — location: 1703

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. — location: 1708

Aiming, at every point in your working life, to have moderate annual savings, moderate free time, no more than a moderate commute, and at least moderate time with your family, increases the odds of being able to stick with a plan and avoid regret than if any one of those things fall to the extreme sides of the spectrum. — location: 1710

The trick is to accept the reality of change and move on as soon as possible — location: 1716

“When I asked Danny how he could start again as if we had never written an earlier draft,” Zweig continued, “he said the words I’ve never forgotten: ‘I have no sunk costs.’ — location: 1722

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. — location: 1724

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. — location: 1736

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 — location: 1749

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. — location: 1753

“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? — location: 1757

Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret—all of which are easy to overlook until you’re dealing with them in real time. — location: 1759

gives big returns and takes them away just as fast. Including dividends the Dow Jones Industrial Average returned about 11% per year from 1950 to 2019, which is great. But the price of success during this period was dreadfully high. The shaded lines in the chart show when it was at least 5% below its previous all-time high. — location: 1766

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. — location: 1812

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. — location: 1807

Market returns are never free and never will be. — location: 1819

Same with investing, where volatility is almost always a fee, not a fine. Market returns are never free and never will be. — location: 1818

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. 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. — location: 1822

It’s hard to overstate how socially devastating financial bubbles can be. They ruin lives. Why do these things happen? And why do they keep happening? Why can’t we learn our lessons? The common answer here is that people are greedy, and greed is an indelible feature of human nature. — location: 1835

no one is crazy. People make financial decisions they regret, and they often do so with scarce information and without logic. But the decisions made sense to them when they were made. — location: 1839

Part of why bubbles are hard to learn from is that they are not like cancer, where a biopsy gives us a clear warning and diagnosis. — location: 1842

In hindsight we’re more likely to point cynical fingers than to learn lessons — location: 1845

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. — location: 1851

When investors have different goals and time horizons—and they do in every asset class—prices that look ridiculous to one person can make sense to another, because the factors those investors pay attention to are different. — location: 1860

An iron rule of finance is that money chases returns to the greatest extent that it can. If an asset has momentum—it’s been moving consistently up for a period of time—it’s not crazy for a group of short-term traders to assume it will keep moving up. Not indefinitely; just for the short period of time they need it to. — location: 1866

Bubbles aren’t so much about valuations rising. That’s just a symptom of something else: time horizons shrinking as more short-term traders enter the playing field. — location: 1872

Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long term to mostly short term. That process feeds on itself. As traders push up short-term returns, they attract even more traders. Before long—and it often doesn’t take long—the dominant market price-setters with the most authority are those with shorter time horizons. Bubbles aren’t so much about valuations rising. That’s just a symptom of something else: time horizons shrinking as more short-term traders enter the playing field. — location: 1869

Investors—particularly the ones setting prices—were not thinking about the next 20 years — location: 1875

it makes perfect sense if you plan on flipping the home in a few months into a market with rising prices to make a quick profit. Which is exactly what many people were doing during the bubble. Data from Attom, a company that tracks real estate transactions, shows the number of houses in America that sold more than once in a 12-month period—they were flipped—rose fivefold during the bubble, from 20,000 in the first quarter of 2000 to over 100,000 in the first quarter of 2004.⁵ — location: 1883

The formation of bubbles isn’t so much about people irrationally participating in long-term investing. They’re about people somewhat rationally moving toward short-term trading to capture momentum that had been feeding on itself. — location: 1892

What do you expect people to do when momentum creates a big short-term return potential? Sit and watch patiently? Never. That’s not how the world works. Profits will always be chased. — location: 1894

Sixty dollars a share was a reasonable price for the traders, because they planned on selling the stock before the end of the day, when its price would probably be higher. But sixty dollars was a disaster in the making for you, because you planned on holding shares for the long run. These two investors rarely even know that each other exist. But they’re on the same field, running toward each other. When their paths blindly collide, someone gets hurt. — location: 1905

It’s hard to grasp that other investors have different goals than we do, because an anchor of psychology is not realizing that rational people can see the world through a different lens than your own. Rising prices persuade all investors in ways the best marketers envy. They are a drug that can turn value-conscious investors into dewy-eyed optimists, detached from their own reality by the actions of someone playing a different game than they are. — location: 1914

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. — location: 1924

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. — location: 1925

“For reasons I have never understood, people like to hear that the world is going to hell.”   —Historian Deirdre McCloskey — location: 1941

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. — location: 1946

Pessimism just sounds smarter and more plausible than optimism. — location: 1976

But mention that good times are ahead, or markets have room to run, or that a company has huge potential, and a common reaction from commentators and spectators alike is that you are either a salesman or comically aloof of risks. — location: 1983

“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. — location: 1991

Another is that pessimists often extrapolate present trends without accounting for how markets adapt. — location: 2027

There is an iron law in economics: extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways. — location: 2031

To a pessimist extrapolating oil trends in 2008, of course things looked bad. To a realist who understood that necessity is the mother of all invention, it was far less scary. — location: 2043

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. — location: 2045

A third is that progress happens too slowly to notice, but setbacks happen too quickly to ignore. — location: 2048

There are lots of overnight tragedies. There are rarely overnight miracles. — location: 2049

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. — location: 2073

And in careers, where reputations take a lifetime to build and a single email to destroy — location: 2086

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. — location: 2087

In investing you must identify the price of success—volatility and loss amid the long backdrop of growth—and be willing to pay it. — location: 2088

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. — location: 2094

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. — location: 2126

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. — location: 2139

There are many things in life that we think are true because we desperately want them to be true. — location: 2145

It seems crazy. But if you desperately need a solution and a good one isn’t known or readily available to you, the path of least resistance is toward Hajaji’s reasoning: willing to believe anything. Not just try anything, but believe it. — location: 2154

Investing is one of the only fields that offers daily opportunities for extreme rewards — location: 2171

But the biggest risk is that you want something to be true so badly that the range of your forecast isn’t even in the same ballpark as reality. — location: 2184

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. — location: 2192

2. Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps. — location: 2196

Even though she knows little, she doesn’t realize it, because she tells herself a coherent story about what’s going on based on the little she does know. All of us, no matter our age, do the same thing. — location: 2206

Take history. It’s just the recounting of stuff that already happened. It should be clear and objective. But as B. H. Liddell Hart writes in the book Why Don’t We Learn From History?:   [History] cannot be interpreted without the aid of imagination and intuition. The sheer quantity of evidence is so overwhelming that selection is inevitable. Where there is selection there is art. Those who read history tend to look for what proves them right and confirms their personal opinions. They defend loyalties. They read with a purpose to affirm or to attack. They resist inconvenient truth since everyone wants to be on the side of the angels. Just as we start wars to end all wars. — location: 2211

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. — location: 2221

Carl Richards writes: “Risk is what’s left over when you think you’ve thought of everything. — location: 2234

But there’s still tremendous demand for forecasts, in both the media and from financial advisors. Why? Psychologist Philip Tetlock once wrote: “We need to believe we live in a predictable, controllable world, so we turn to authoritative-sounding people who promise — location: 2235

Psychologist Philip Tetlock once wrote: “We need to believe we live in a predictable, controllable world, so we turn to authoritative-sounding people who promise to satisfy that need.” Satisfying that need is a great way to put it. Wanting to believe we are in control is an emotional itch that needs to be scratched, rather than an analytical problem to be calculated and solved. The illusion of control is more persuasive than the reality of uncertainty. So we cling to stories about outcomes being in our control. — location: 2237

Business, economics, and investing, are fields of uncertainty, overwhelmingly driven by decisions that can’t easily be explained with clean formulas — location: 2246

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. — location: 2249

However, entrepreneurs naturally focus on what they know best—their plans and actions and the most immediate threats and opportunities, such as the availability of funding. They know less about their competitors and therefore find it natural to imagine a future in which the competition plays little part. — location: 2259

The one who’s confident he knows what’s happening based on what he sees but turns out to be completely wrong because he can’t know the stories going on inside everyone else’s head? He’s all of us. — location: 2265

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. — location: 2302

Financial advisors are the same. 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. — location: 2308

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. — location: 2312

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. — location: 2315

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. — location: 2318

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. — location: 2321

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. — location: 2324

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 — location: 2329

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. — location: 2331

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 — location: 2333

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 — location: 2336

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. — location: 2339

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. — location: 2342

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. — location: 2343

Define the game you’re playing, and make sure your actions are not being influenced by people playing a different game. — location: 2345

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. — location: 2346

Charlie Munger once said “I did not intend to get rich. I just wanted to get independent.” — location: 2377

We can leave aside rich, but independence has always been my personal financial goal. Chasing the highest returns or leveraging my assets to live the most luxurious life has little interest to me. Both look like games people do to impress their friends, and both have hidden risks. I mostly just want to wake up every day knowing my family and I can do whatever we want to do on our own terms. Every financial decision we make revolves around that goal. — location: 2378

Being able to wake up one morning and change what you’re doing, on your own terms, whenever you’re ready, seems like the grandmother of all financial goals. 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. — location: 2387

Nassim Taleb explained: “True success is exiting some rat race to modulate one’s activities for peace of mind.” I like that. — location: 2407

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. — location: 2405

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. — location: 2418

But everything I’ve learned about personal finance tells me that everyone—without exception—will eventually face a huge expense they did not expect—and they don’t plan for these expenses specifically because they did not expect them. — location: 2421

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. — location: 2424

And that’s about it. Effectively all of our net worth is a house, a checking account, and some Vanguard index funds. It doesn’t need to be more complicated than that for us. I like it simple. One of my deeply held investing beliefs is that there is little correlation between investment effort and investment results. The reason is because the world is driven by tails—a few variables account for the majority of returns — location: 2450

No matter how hard you try at investing you won’t do well if you miss the two or three things that move the needle in your strategy — location: 2453

Simple investment strategies can work great as long as they capture the few things that are important to that strategy’s success. — location: 2454

My investing strategy doesn’t rely on picking the right sector, or timing the next recession. It relies on a high savings rate, patience, and optimism that the global economy will create value over the next several decades — location: 2455

If you fell asleep in 1945 and woke up in 2020 you would not recognize the world around you. The amount of economic growth that took place during that period is virtually unprecedented. — location: 2467

This fear was exacerbated by the fact that exports couldn’t be immediately relied upon for growth, as two of the largest economies—Europe and Japan—sat in ruins dealing with humanitarian crises. And America itself was buried in more debt than ever before, limiting direct government stimulus. — location: 2502

The answer to the question, “What are all these GIs going to do after the war?” was now obvious. They were going to buy stuff, with money earned from their jobs making new stuff, helped by cheap borrowed money to buy even more stuff — location: 2548

Gains are shared more equally than ever before.   The defining characteristic of economics in the 1950s is that the country got rich by making the poor less poor. — location: 2550

Everything in finance is data within the context of expectations — location: 2612

The biggest difference between the economy of the 1945–1973 period and that of the 1982–2000 period was that the same amount of growth found its way into totally different pockets. — location: 2633

Between 1993 and 2012, the top 1 percent saw their incomes grow 86.1 percent, while the bottom 99 percent saw just 6.6 percent growth — location: 2636

All that matters is that sharp inequality became a force over the last 35 years, and it happened during a period where, culturally, Americans held onto two ideas rooted in the post-WW2 economy: That you should live a lifestyle similar to most other Americans, and that taking on debt to finance that lifestyle is acceptable. — location: 2642

The lifestyles of a small portion of legitimately rich Americans inflated the aspirations of the majority of Americans, whose incomes weren’t rising. — location: 2648

Economist Hyman Minsky described the beginning of debt crises: The moment when people take on more debt than they can service. It’s an ugly, painful moment. — location: 2670

Quantitative easing both prevented economic collapse and boosted asset prices, a boon for those who owned them—mostly rich people. The Fed backstopped corporate debt in 2008. That helped those who owned that debt—mostly rich people. Tax cuts over the last 20 years have predominantly gone to those with higher incomes. People with higher incomes send their kids to the best colleges. Those kids can go on to earn higher incomes and invest in corporate debt that will be backstopped by the Fed, own stocks that will be supported by various government policies, and so on. — location: 2676

But they’re symptomatic of the bigger — location: 2682

None of these things are problems in and of themselves, which is why they stay in place. But they’re symptomatic of the bigger thing that’s happened since the early 1980s: The economy works better for some people than others. Success isn’t as meritocratic as it used to be and, when success is granted, it’s rewarded with higher gains than in previous eras. — location: 2681

Benedict Evans says, “The more the Internet exposes people to new points of view, the angrier people get that different views exist.” That’s a big shift from the post-war economy where the range of economic opinions were smaller, both because the actual range of outcomes was lower and because it wasn’t as easy to see and learn what other people thought and how they lived — location: 2698

And the era of “We need something radically new, right now, whatever it is” may stick around. Which, in a way, is part of what starts events that led to things like World War II, where this story began. History is just one damned thing after another — location: 2708