Summary

Morgan Housel describes the role that personal experience and bias plays in our financial decisions. To overcome this, focus on compounding wealth, leave room for uncertainty through diversification, prefer reasonable over rational, don’t over-rely on history, accept that your goals and personality will change, avoid envy, balance the roles of both luck and skill, and hone your mental models. Money’s greatest value is its ability to provide control over one’s time.

Key Takeaways

• No one’s views are crazy: we all must face the 99.9999% of the global viewpoint that we don’t know, including the unknown unknown and form our own limited, abstract mental models for how to world works
• Find the balance between accepting luck / no control and championing role of skill, autonomy, control (happiest people are latter, most literal is former)
• No single right price for a stock: time horizon affects willingness to pay. Bubbles generally due to price being pushed up by people with long time horizons following people with short time horizons
• Tail-driven returns: (VC) Effectively all gains have come from top 7% of companies
• Loss aversion causes us to heed pessimism over optimism

“Money’s greatest intrinsic value is its ability to give you control over your time”

“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” - Angus Campbell

“Progress happens too slowly to notice but setbacks happen to quickly to ignore”“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”“Risk is what’s left over then you’ve thought of everything” - Carl Richards

Notes

1 No One’s Crazy

• Personal experience strongly shapes view on how money works
• 0.0001% of global viewpoint but 80% of personal beliefs for how money works
• Time period is greatest indicator of money habits
• Idea of right to retirement only since the 70s
• No one’s views are crazy - all anecdotal

2 Luck and Risk

• Robert Schiller: the one unknowable thing about investing is “the exact role of luck in successful outcomes”
• When accepting luck, must accept risk
• Bigger correlation between sibling wealth than height or weight
• Study the average cases, not the extremes

3 Never Enough

• Comparing yourself to the next wealth tier is a battle that can never be won
• Try to know when enough is enough

4 Confounding Compounding

• Warren buffet: $40B+ over 75 years, 22%/y
• However, if normal 30-60, only $12M
• So, success more attributed to long duration of success rather than rapidity

5 Getting vs Staying Wealthy

• Being rich is a game of survival mindset
  • “Growth amid loss”
• 40% of public companies lost all value
• World’s 100 richest: 20% turnover / decade
• Last 170 years:
  • 20x GDP / capita
  • 33 recessions, 48 years
  • Stocks 10%+ drop 102 times, 1/3+ 12x
  • 7%+ inflation in 20 years

6 Tails, You Win

• Tail-driven returns: based on big winners
• Tail end events drive profits / everything
• Of 21k venture financings (’04-’14):
  • 65% lost money
  • 2.5% 10-20x
  • 1% 20x+
  • 0.5% 50x+
• Russel 3000 index performance since ’80:
  • 40% lost 70%+ of value
  • Effectively all gains from top 7%
  • 73x returns since 1980 (to 2020?)
• Even within companies, tail drives success
• Long-term performance hinges on choices in the 1% scenarios
• Better to continuously invest than try and time the market (400k vs 250k)

7 Freedom

• Angus Campbell:* “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”* (eg. wealth)
• “Money’s greatest intrinsic value is its ability to give you control over your time”
• Happiness has not increased despite living conditions due to type of jobs, autonomy
• 60% of jobs rely at least partially on thought (non-service / tangible)
• 30 lessons for living

8 Man in the Car Paradox

• When flexing wealth (eg. Luxury car), people use you as a benchmark and think about car, not you personally
• Little point in investing in materialistic goods for respect

9 Wealth is What You Don’t See

• “Wealth is income not spent”
• People who want to be millionaires often just want to spend $1M, not save $1M

10 Save Money

• Be more efficient with your money
• Learn to be happy with less money

11 Reasonable > Rational

• Pursuing a strategy you are motivated by is more important than strict rationality

12 Surprise!

• Things that have never happened before happen all the time, yet we use history to guide decisions
• Historians as prophets fallacy: over-reliance on past data where innovation, change is the lifeblood of progress
• Long tail of black swan events by influence
• Length between recessions has gotten longer over time (2 years → 5, 12 is record)

13 Room for Error

• Leave margin for error and uncertainty
• Even if you survive it, it will be mentally degrading and leave you without resources to take advantage of bull market
• Optimism bias in risk taking: Attachment to favorable odds when downsides are unacceptable in any circumstance
• Don’t have a single point of failure

14 You’ll Change

• “Things change - both the world around you and your own goals and desires”
• End of history illusion: We are keenly aware of how much we’ve changed in the past but to underestimate how much personalities, desires, goals will change in future
• Stay moderate - don’t go to the extremes with any aspect of your life to avoid regret when things change
• Accept that you will change your mind
• Watch out for the sunken cost fallacy

15 Nothing’s Free

• Often underestimate cost of unwitnessed event until it occurs
• Even greatest stocks trade below high 95% of time
• Trying to time market (tactical funds during 2011 recession fears) is playing a risky game that won’t pay off 90% of time
• View market volatility as fee rather than fine

16 You and Me

• There is no single right price for a stock: time horizon affects willingness to pay
• Bubbles generally due to price being pushed up by people with long time horizons (years) following people with short time horizons (eg. Day traders, mutual funds with 100%+ turnovers)
• Short horizon: Not worried about fundamentals, just know price is consistently going up for the time being
• Identify what game you’re playing
• Know what game other investors are playing and don’t follow the wrong crowd

17 The Section of Pessimism

• “Pessimism sounds smarter and more plausible than optimism”
• Optimism sounds like salesman while pessimist is on your side, warning you
• Pessimists often extrapolate without factoring in how markets will adapt
• Loss aversion: Hurts 2x as much
• “Progress happens too slowly to notice but setbacks happen to quickly to ignore”

18 When You’ll Believe Anything

• Narrative is the most powerful driver of the economy, not tangible circumstances
• 85% of mutual funds don’t achieve their own targets
• We don’t know what we don’t know, so we explain the world through a limited set of limited mental models
• “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”
• Guessing average market returns is more accurate than the yearly projections of top 20 analysts from big banks
• Unforeseen events control most outcomes anyways
• Carl Richards: “risk is what’s left over then you’ve thought of everything”
• Have to find the balance between accepting luck / no control and championing skill’s role / autonomy / control (happiest people are latter, most literal is former)

19 All Together Now

• You are the ultimate guide of your financial journey, advisors are only estimating based on their limited knowledge

Postscript

• Mass commoditization instilled value in mid 20th century that people of most incomes should live similar lifestyles
• Keeping up with the Jones: applied pressure to continue keeping similar lifestyle, leading to higher debt and spending above means
• Debt / income has been rising since the 70s from 60% → 130% in 2007 → 100% now