My dad told me it would make him happy if I read Morgan Housel's book, The Psychology of Money, and I love my dad, so I did. Here are the key takeaways I think the book spotlighted, specifically ones that students might find useful.
I found a lot of it to be common sense, but here are the more interesting, nuanced, or significant opinions and facts Housel included.
Chapter 1: No One's Crazy
- If you were born in 1970, the S+P 500 increased almost 10-fold in your teens and 20s, versus folks born 20 years earlier had little to no growth-- luck of the timing!
- Americans spend more on lottery tickets than movies and books combined-- and it's mostly poor people that buy them
- Lowest-income households averaged 412 dollars per year on the lottery
- At the same time, 40% Americans claim to not have 400 dollars for an emergency
- In 1940, only 1 of every 20 Americans had a Bachelor's degree, but now it is 11 in every 4
- "Here we are, with between 20 and 50 years of experience in the modern financial system, hoping to be perfectly acclimated....there is not decades of accumulated experience to even attempt to learn from. We're winging it."
Chapter 2: Luck & Risk
- "be careful when assuming that 100% of outcomes can be attributed to effort and decisions"
- Never look at extreme examples as a path to success (such as Gates or Zuckerberg)
- Bill Gates said "Success is a lousy teacher. It seduces smart people into thinking they can't lose."
Chapter 3: Never Enough
- At a fancy party on Shelter Island, Joseph Heller, author of Catch-22, was told by Kurt Vonnegut that the party's host made more money in just one day than Heller had gotten from the book since publication, to which Heller said "Yes, but I have something he will never have...enough."
- Bernie Madoff, before being a conman, was a very successful market maker (a legit job that was not illegal) -- so why did he need to turn to fraud for more? If he already was super wealthy?
- "The hardest financial skill is getting the goalpost to stop moving."
- "Modern capitalism is a pro at two things: generating wealth and generating envy."
Chapter 4: Confounding Compounding
- 81.5 billion of Warren Buffet's 84.5 billion came after he turned 65-- he set himself up for success in many ways, one of which was being a good investor from a really young age (10!)
- "His skill is investing, but his secret is time."
- Hard to wrap your mind around because our brain handles linear thinking (8+8+8) much easier than exponential (8x8x8) -- compound interest operates as the latter
- "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."
Chapter 5: Getting Wealthy vs Staying Wealthy
- "Only one way to stay wealthy: some combination of frugality and paranoia"
- Great Depression era
- Wall Street men were committing suicide en masse after the stock market crashed
- Jesse Livermore, a very successful stock market trader, happened to bet in October 1929 that the stocks would decline, making him even richer
- Livermore got cocky and made huge bets, ending up in huge debt, and then committing suicide himself
- 40% of companies that have made it to public trading have lost all or almost all their value
- Getting wealthy can require risk, staying wealthy generally means not taking any
- "barbelled personality"
- Sensible optimism
- From 1850 to 2020:
- Stocks lost a third of their value 12+ times
- Annual inflation exceeded 7% in 20+ years
- 99.9% of all companies formed went out of business
Chapter 6: Tails, You Win
- "You can be wrong half the time and still make a fortune."
- Long tails: "the farthest ends of a distribution of outcomes" (aka the ends of a bell curve)
- huge amounts of influence!
- Walt Disney
- The first few hundred cartoons cost a ton of money to produce; Disney Studios was effectively bankrupt
- Snow White earned $8 million in its first 6 months (in 1938!) and transformed Disney Studios, pulling them out of debt and filling them with assets
- Tail event, an outlier in other words
- Venture capital-- For every 50 investments a VS makes, somewhere around half are expected to fail, a handful to do pretty well, and 1-2 to explode with returns
- Russell 3000 Index: a big collection of established corporations/public companies that has been around since 1980
- 40% lost at least 70% of their value and had not recovered, HOWEVER, the index still returned for those who had it, courtesy of 7% of the companies who were just outperforming everyone else
- Napolean defined a military genius as someone "who can do the average thing when all those around him are going crazy"
- "If you're a good stock picker you'll be right maybe half the time....If you're a good investor most years will be just okay, and plenty will be bad."
Chapter 7: Freedom
- Time is money, as they say
- Feeling like you are controlling your own life is a common denominator amongst happy people
- Consider: investment bankers make a ton of money but usually aren't that happy because they work such long and hard hours
- Reactance: "doing something you love on a schedule you can't control can feel the same as doing something you hate"
- The US is the richest nation but its citizens are not the happiest
- More than a third of today's jobs are "managers, officials, and professionals" and because these are generally more mental than physical, your work comes home with you in a way
- "If the operating equipment of the 21st century is a portable device, this means the modern factory is not a place at all. It is the day itself." -Derek Thompson, The Atlantic
Chapter 8: Man in the Car Paradox
- People want wealth to show other people that they are cool, but when we see wealth we think about our desire for that wealth and thus that coolness rather than attributing it to the person at hand
- When you see a cool car, you rarely look at the driver themself
Chapter 9: Wealth is What You Don't See
- Frequently people that are flashy with their wealth are people that feel like they have something to prove
- Ex: moderately wealthy businessman who spent his entire bonus on a Ferrari
- "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"
- Rihanna sued her financial advisor because she almost went bankrupt due to spending so much money and the advisor said "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?"
- Apparently yes, people do need to be told to not spend a million dollars if they want to be a millionaire
- Wealthy vs rich
- Rich is your current income
- Wealth is in value, in income not spent
- Ronald Read kept all of his wealth hidden even from his close friends but when he passed away, he had a ton of money left behind
Chapter 10: Save money
- What you spend is the easiest thing you have financial control over
- "You can build wealth without a high income, but have no chance of building wealth without a high savings rate"
Chapter 11: Reasonable > Rational
- Rational decisions are what computers do because they have no emotions or experiences
- An unrealistic expectation for humans
- Julius Wagner-Jauregg (19th century psychiatrist) tried to cure syphilis with malaria
- Syphilis patients tended to recover if they had fevers
- --> Wagner-Jauregg assumed that fevers must help fight infection, so he should give the patients fevers somehow
- --> He injected patients with small amounts of malaria, with quinine on hand to counter it after the fevers ran their courses
- 6/10 patients recovered with his "malariotherapy" and he won the Nobel Prize for this discovery
- Fevers have been thought of as a bad thing but they are actually good for sick folks because it activates the immune system to do its job
- Academic finance looks for the mathematically optimized strategy but the average Joe wants one that "maximizes for how well they sleep at night"
- Harry Markowitz, winner of the Nobel Prize for his work on risk and return, talked about minimizing future regret
- on paper, minimizing possible regret is hard to account for but makes sense to us
- If you are invested in companies you feel good about, the blow of them not doing well is lessened by the fact that you feel good about being a part of it
Chapter 12: Surprise!
- History as foundational understanding, expectation calibration, and a rough guide towards what works
- "Historians as prophets" fallacy: relying too much on pasta data as a means to guessing future conditions amongst innovation and change
- Richard Feynman, physicist: "Imagine how much harder physics would be if electrons had feelings."
- (Like investors and businesspeople do!)
- Outlier events make the largest impact and have no historical precedence
- Ex: Great Depression, the World Wars, 9/11, etc
- These kinds of events compound beyond just the immediate impact
- 9/11 --> Federal Reserve cut interest rates --> financial crisis --> bad job market --> more people went to college --> 1.6 trillion in student loan debt
- Butterfly effect!
- Structural changes have altered the landscape so certain same events might have a different impact
- Consider; VCs, IRAs, technology, etc
- Basically the further back you look, the less stock you should put into what you see
Chapter 13: Room for Error
- "History is littered with good ideas taken too far, which are indistinguishable from bad ideas."
- "the purpose of the margin of safety is to render the forecast unneccesary" - Benjamin Graham, creator of the concept
- gray area is where we are and should be
- "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"
- Contexts in which to consider:
- Volatility of the market (and thus your holdings)
- Saving for retirement
- Taking risks is one thing, but there is no risk that could wipe you out that is worth taking
- Ex: Russian Roulette-- the odds are in your favor but it's not worth it
- The author thinks of some of his money as risky money and some as safe money
- Lots of systems have backups to help avoid catastrophic error
- Ex: jets have multiple engines but only really need one
- Non-ex: At the Battle of Stalingrad during WW2 (largest battle in history), German tanks sat in grasslands awaiting use, but when they were needed, it was discovered that mice had eaten away at the electric systems so none of them worked
Chapter 14: You'll Change
- Basically: what you want now might be different than what you want in 30 years
- Only around a quarter of college grads work a job related to their major
- Large market for tattoo removal!
- Some young people spend all their money on adventures but are then unprepared for having a family or retiring, others save money and work hard but waste their 20s in an office
Chapter 15: Nothing's Free
- Everything looks easy when it is not your responsibility-- in other words, decisions are more complex than they seem and humans are frequently overconfident
- The stock market is a temptress, market returns are sirens--at the same time, it is choosing delayed gratification over immediate satisfaction
- "Sometimes it rains at Disneyland. But if you view the admission fee as a fine, you'll never enjoy the magic."
Chapter 16: You & Me
- No one ever fully agrees on cause and blame in the economy
- We are all on unique timelines
- The question "How much should I pay for X stock" is going to depend on how much time you want to be invested for etc
- People chase profits-- when long-term investors start following the lead of short-term investors, it doesn't yield the same benefits
Chapter 17: The Seduction of Pessimism
- "Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you."
- People pay more attention to pessimism and take it more seriously
- "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."
- Amidst the 2008 economic crisis, the Wall Street Journal published an article suggesting that everything was going to get even worse
- Specifically, the author of the article suggested America will break into 3 pieces
- Why are we so intrigued by pessimism?
- Evolution-- loss aversion as a shield from threats
- Money affects everything and everyone
- "Progress happens too slowly to notice, but setbacks happen too quickly to ignore" / growth comes from compounding over time, destruction can happen in a single failure
- Statistics are scarier without context
- Reduction in expectations --> higher likelihood you are pleased with outcomes
- Law of economics: "extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways"
- Ex: oil seemed to be running out --> oil prices surged --> new more affordable drilling technologies AND new non-oil energy sources
