Rating: 9/10
Book in 3 sentences
- The Hardest financial skill is getting the financial goal to stop moving — There is never enough when it comes to “The money”
- The secret of having a lot of wealth is Time. Keeping money requires humility, fear that what you’ve made can be taken away, requires frugality and acceptance that some of what you’ve made is attributable to luck and past success.
- Building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
My Impression:
I liked this book because it helped me reaffirm some of my beliefs around why savings is important and how to be content with your earnings. Also, it is important to be patient when it comes to growing money and we should always be prepared for any financial adversities that may occur. Progress happens too slowly to notice, but setbacks happen too quickly to ignore. Finally, have enough money so that it gives you the ability to do what you want, when you want, with whom you want, for as long as you want to.
Who should read it?
- Everyone !! The most important criterion for financial success is building good financial habits. This book explains in great detail with stories about the importance of financial habits.
- If you are a young adult it will help you understand the power of compounding in finance and why it’s important to invest early.
Highlights
- A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.” – Behaviour around money is important training is not ..
- “Ronald James Read was an American philanthropist, investor, janitor, and gas station attendant.”
- “One, financial outcomes are driven by luck, independent of intelligence and effort. Or, two (and I think more common), that financial success is not hard science. It’s a soft skill, where how you behave is more important than what you know.”
- “Engineers can determine the cause of a bridge collapse because there’s agreement that if a certain amount of force is applied to a certain area, that area will break. Physics isn’t controversial. It’s guided by laws. Finance is different. It’s guided by people’s behaviors. And how I behave might make sense to me but look crazy to you.”
No One’s Crazy:
“Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.”
“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—we all make decisions based on our own unique experiences that seem to make sense to us in a given moment.”
Luck & Risk –
- “Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes. They are driven by the same thing: You are one person in a game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take”
- “The line between bold and reckless can be thin. When we don’t give risk and luck their proper billing it’s often invisible.”
- “Risk and luck are doppelgangers”
- “Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.”
- Keep this in mind when judging people, including yourself.
- “Therefore, focus less on specific individuals and case studies and more on broad patterns.”
Never Enough –
“The question we should ask of both Gupta and Madoff is why someone worth hundreds of millions of dollars would be so desperate for more money that they risked everything in pursuit of even more.”
- The hardest financial skill is getting the goalpost to stop moving”
- Social comparison is the problem.
- “Enough is not too little” – “Enough” is realizing that the opposite—an insatiable appetite for more—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 it’s time to stop taking risks that might harm them. Knowing when you have enough.
Confounding Compounding
- “If something compounds—if a little growth serves as the fuel for future growth—a small starting base can lead to results so extraordinary they seem to defy logic. It can be so logic-defying that you underestimate what’s possible, where growth comes from, and what it can lead to.”
- “Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s.”
- “Effectively all of Warren Buffett’s financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years.
- His skill is investing, but his secret is time.”
Getting Wealthy Vs Staying Wealthy
- Good Investing is not necessarily about making decisions. It’s about consistently not screwing up
- Getting Money is one thing, Keeping it is another.
- “Getting money requires taking risks, being optimistic, and putting yourself out there.
- But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.
- “Not “growth” or “brains” or “insight.” The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. This should be the cornerstone of your strategy, whether it’s in investing or your career or a business you own.”
- Applying survival Mindset.
- 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
- Planning is important, but the most important part of every plan is to plan on the plan not going according to plan
- A barbelled personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.”
Tails, You Win
- You can be wrong half the time and still make a fortune.
- Anything that is huge, profitable, famous, or influential is the result of a tail event—an outlying one-in-thousands or millions event. And most of our attention goes to things that are huge, profitable, famous, or influential. When most of what we pay attention to is the result of a tail, it’s easy to underestimate how rare and powerful they are…
- If a VC makes 50 investments they likely expect half of them to fail, 10 to do pretty well, and one or two to be bonanzas that drive
Freedom
- Controlling your time is the highest dividend money pays.
- 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 we have considered.
- More than your salary. More than the size of your house. More than the prestige of your job. Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that makes people happy.
- 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.
- Take it from those who have lived through everything: Controlling your time is the highest dividend money pays
Man in the Car Paradox
- 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
- Spending money to show people how much money you have is the fastest way to have less money.
- “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 world is filled with people who look modest but are actually wealthy and people who look rich who live at the razor’s edge of insolvency. Keep this in mind when quickly judging others’ success and setting your own goals.”
Save Money
- “The first idea—simple, but easy to overlook—is that building wealth has little to do with your income or investment returns, and lots to do with your savings rate.”
- “Personal savings and frugality—finance’s conservation and efficiency—are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future as they are today.”
- The value of wealth is relative to what you need.
- Past a certain level of income, what you need is just what sits below your ego.
- The most powerful way to increase your savings isn’t to raise your income. It’s to raise your humility.
- People’s ability to save is more in their control than they might think.
- You don’t need a specific reason to save.
- Savings in the bank that earn 0% interest might actually generate an extraordinary return if they give you the flexibility to take a job with a lower salary but more purpose, or wait for investment opportunities that come when those without flexibility turn desperate.
Reasonable Rational – Aiming to be mostly reasonable works better than trying to be coldly rational
Surprise
- You’ll likely miss the outlier events that move the needle the most. – “The most important events in historical data are the big outliers, the record-breaking events. They are what move the needle in the economy and the stock market. The Great Depression. World War II. The dot-com bubble. September 11th. The housing crash of the mid-2000s. A handful of outlier events play an enormous role because they influence so many unrelated events in their wake”
- 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.
- 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.
- 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.
Room for Error
- The most important part of every plan is planning on your plan not going according to plan.
- The wisdom in having room for error is acknowledging that uncertainty, randomness, and chance—“unknowns”—are an ever-present part of life. The only way to deal with them is by increasing the gap between what you think will happen and what can happen while still leaving you capable of fighting another day.
- Benjamin Graham – “the purpose of the margin of safety is to render the forecast unnecessary. – “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. And almost everything related to money exists in that kind of world.
- Can you survive your assets declining by 30%? On a spreadsheet, maybe yes—in terms of actually paying your bills and staying cash-flow positive. But what about mentally? It is easy to underestimate what a 30% decline does to your psyche. Your confidence may become shot at the very moment opportunity is at its highest. You—or your spouse—may decide it’s time for a new plan, or new career. I know several investors who quit after losses because they were exhausted. Physically exhausted.
- “The solution is simple: Use room for error when estimating your future returns. This is more art than science. For my own investments, 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. 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. 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. Wonderful.
You’ll Change
- Long-term planning is harder than it seems because people’s goals and desires change over time.
- 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. And the truth is, few of us do. It’s hard to make enduring long-term decisions when your view of what you’ll want in the future is likely to shift.
- 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. So young people pay good money to get tattoos removed that teenagers paid good money to get. Middle-aged people rushed to divorce people who young adults rushed to marry. Older adults work hard to lose what middle-aged adults worked hard to gain. On and on and on.
- 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.
- We should also come to accept the reality of changing our minds. Some of the most miserable workers I’ve met are people who stay loyal to a career only because it’s the field they picked when deciding on a college major at age 18. When you accept the End of History Illusion, you realize that the odds of picking a job when you’re not old enough to drink that you will still enjoy when you’re old enough to qualify for Social Security are low.
Nothing’s Free –
- Everything has a price, but not all prices appear on labels.
- Beware of taking financial cues from people playing a different game than you are
The Seduction of Pessimism
- Hans Rosling: “I am not an optimist. I am a very serious possibilist.”
- Pessimism just sounds smarter and more plausible than optimism – “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
- Money is ubiquitous, so something bad happening tends to affect everyone and captures everyone’s attention. 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. In a connected system where one person’s decisions can affect everyone else, it’s understandable why financial risks gain a spotlight and capture attention in a way few other topics can.
- Pessimists often extrapolate present trends without accounting for how markets adapt.
- Progress happens too slowly to notice, but setbacks happen too quickly to ignore. – There are lots of overnight tragedies. There are rarely overnight miracles.
- 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
When you’ll Believe Anything
- 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.
- Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.
- Carl Richards writes: “Risk is what’s left over when you think you’ve thought of everything.
- “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.”
- “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”
All Together Now – The Summary
- 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.
- 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.
- 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.
- 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.
- “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”
- 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.
- 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.
- 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).
- “Worship room for error. “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.
- 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.
- Define the game you’re playing, and make sure your actions are not being influenced by people playing a different game.
- 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.
- Charlie Munger put it well: “The first rule of compounding is to never interrupt it unnecessarily.