People do some crazy things with money. But no one is crazy.

  • 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.
    • And that idea- "What you're doing seems crazy but I kind of understand why you're doing it." - uncovers the root of many of our financial decisions.
  • We all do crazy stuff with money, because we're all relatively new to this game and what looks crazy to you might make sense to me. But no one is crazy β€” we all make decisions based on our own unique experiences that seem to make sense to us in a given moment.

Luck and risk are siblings

"Nothing is as good or as bad as it seems."
  • Luck and Risk are both the reality that every outcome in life is guided by forces other than individual effort.
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When judging others, attributing success to luck makes you look jealous and mean, even if you know it exists. And when judging yourself, attributing success to luck can be too demoralizing to accept.
  • Realize that someone else's failure is usually attributed to bad decisions, while your own failures are usually chalked up to the dark side of the risk.
  • The line between "inspiringly bold" and "foolishly reckless" can be a millimeter thick and only visible with hindsight.
  • 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 the extreme ends of luck or risk.

Never Enough

To make money they don't have and didn't need, they risked what they have and did need. And that's foolish. It is just plain foolish. If you risk something that is important to you for something that is unimportant to you, it just does not make any sense. - Warren Buffet
  • The hardest financial skill is getting the goalpost to stop moving.
    • Modern capitalism is a pro at two things: Generating wealth and generating envy.
    • But life isn't any fun without a sense of enough. Happiness, as it's said, just results minus expectations
  • Social comparison is the problem here.
    • The point is that the ceiling of social comparison is so high that virtually no one will ever hit it. This means it's a battle that never be won, or that the only way to win is not to fight to begin with β€” t accept that you might have enough, even if it's less than those around you.
  • "Enough" is not too little.
    • Enough is realizing that the opposite β€” an insatiable appetite for more β€” will push you to the point of regret.
  • There are many things never worth risking, no matter the potential gain.
    • 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 its time to stop taking risks that might harm them. Knowing when you have enough.

Compounding

  • Warren Buffet's skill is investing, but his secret is time. That's how compounding works.
  • Linear thinking is so much more intuitive than exponential thinking.
  • The counterintuitive nature of compounding leads even the smartest of us too overlook its power.
  • The danger here is that when compounding isn't intuitive we often ignore its potential and focus on solving problems through other means. Not because we are overthinking, but because we rarely stop to consider compounding potential.
  • 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.

Getting Wealthy vs Staying Wealthy

  • Good investing is not necessarily about making good decisions. It's about consistently not screwing up.
  • Applying the survival mindset to the real world comes down to appreciating three things:
      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.
      1. Planning is important, but the most important part of every plan is to plan on the plan not going according to the plan.
          • A plan is only useful if it can survive reality. And a future filled with unknowns is everyone's reality.
          • Many bets fail not because they were wrong, but because they were mostly right in a situation that required things to be exactly right.
          • Room for error β€” often called margin of safety β€” is one of the most underappreciated forces in finance.
      1. A barbelled personality β€” optimistic about the future, but paranoid about what will prevent you from getting to the futureβ€” is vital.
          • Sensible optimism is a belief that the odds are in your favor, and over time things will balance out to a good outcome even if what happens in between is filled with misery.
          • Destruction in the face of progress is not only possible but an efficient way to get rid of excess.

You can be wrong half the time and still make a fortune:

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Tails drive everything.
  • Anything that is huge, profitable, famous, or influential is the result of a tail eventβ€”an outlying one-in-thousand or millions event. And most of our attention goes to things that are huge, profitable, famous, or influential.
  • The idea that a few things account for most results is not just true for companies in your investment portfolio. It's also an important part of your own behavior as an investor.
A genius is a man who can do the average thing when everyone else around him is losing his mind.
  • 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 for 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.

Freedom:

  • 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.
  • Compared to generations prior, control over your time has diminished. And since controlling your time is such a key happiness influencer, we shouldn't be surprised that people don't feel much happier even though we are, on average, richer than ever.

No one is interested in your possessions as much as you are.

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When you see someone driving a nice car, you rarely think, β€œWow, the guy driving that car is cool.” Instead, you think, β€œWow, if I had that car people would think I’m cool.” Subconscious or not, this is how people think.
  • 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.

Wealth is What You Don't See

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Spending money to show people how much money you have is the fastest way to have less money.
  • Rich is current income, but wealth is hidden. Its income not spent.
  • 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.

Save Money

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You don't need a specific reason to save.
  • One of the most powerful ways to increase your savings isn't to raise your income. It's to raise your humility.
  • Past a certain level of income, what you need is just what sits below your ego.

Reasonable > Rational

  • 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.
  • Fevers turn on the body's immune system. They help the body fight infection. Normal fevers between 100 deg and 104 deg F are good for sick children. Fevers hurt. And people don't want to hurt.
  • What's often overlooked in finance is that something can be technically true but contextually non-sense.

Surprise

  • History is the study of change, ironically used as a map of the future.
  • The most important driver of anything tied to money is the stories people tell themselves and the preferences they have for goods and services. They are always changing and always will.
  • Realizing the future might not look anything like the past is a special king of skill that is not generally looked highly upon by the financial forecasting community.
  • 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.

Room for Error

  • Margin of safety β€” you can also call it room for error or redundancy β€” is the only effective way to safely navigate a world that is governed by odds, not certainties.
  • 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.
  • An important cousin of room for error is what I call optimism bias in risk taking:
    • The idea is that you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking.
    • Leverage is the devil here. Leverage β€” taking on debt to make your money go further β€” pushes routine risks into something capable of producing ruin.
  • 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 the single point of failure.

You'll Change

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Long term planning is harder than it seems because people's goals and desires change over time.
" 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. -Daniel Gilbert
  • There are two things to keep in mind when making what you think are long-term decisions:
      1. We should avoid extreme ends of financial planning.
          • Regrets are extremely 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 the lost time.
          • Endurance is the 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.
      1. We should also come to accept the reality of changing our minds.
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" The first rule of compounding is never interrupt" - Charlie Munger

Nothing's Free

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Everything has a price, but not all prices appear on labels.
  • Most things are harder in practice than they are in theory. It's because we are not good at identifying what the price of success is, which prevents us from being able to pay it.
  • The irony is that by trying to avoid the price, investors end up paying double.
  • 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.
  • The natural response for anyone who watches their wealth decline and views that drop as a fine is to avoid future fines.

You & Me

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Investors often innocently take cues from other investors who are playing a different game than they are.
  • An iron rule of finance is that money chases returns to the greatest extent that it can.
  • Being swayed by people playing a different game can also throw off how you think you're supposed to spend your money.
  • A takeaway here is that few things mater more with money than understanding your own time horizon and no being persuaded by the actions and behaviors of people playing different games than you are.

The Seduction of Pessimism

  • Optimism(The feeling that all is going to turn out well) sounds like a sales pitch. Pessimism (The feeling that things will turn out badly)sounds like someone trying to help you.
  • Real optimists don't believe that everything will be great. That's complacency. Optimism a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way.
  • Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.
  • 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.
  • Growth is driven by compounding, which always takes time. Destruction is driven by single point of failure, which can happen in seconds, and loss of confidence which can happen in an instant.

When You'll Believe Anything

  • At the personal level, there are two things to keep in mind about a story driven world when managing your money.
      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.
          • 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."
          • An appealing fiction happens when you are smart, you want to find solutions, but face a combination of limited control and high stakes.
          • Investing is one of the only fields that offers daily opportunities to extreme rewards.
          • The biggest 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.
          • 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.
          • There is no greater force in finance than room for error, and the higher the stakes, the wider it should be.
      1. Everyone has a incomplete view of the world. But we form a complete narrative to fill in the gaps(effectively blind spots).
          • 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 though when it doesn't make sense. That's a big deal in producing mistakes in many fields.
          • Coming to terms that how much you don't know means coming to terms with how much of what happens in the world is out of your control. And that can be hard to accept.
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          Risk is what's left over when you think you've thought of everything.
          We need to believe we live in a predictable, controllable world, so we turn to authoritative- sounding people who promise to satisfy that need.
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