The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people. (Location 41)
Tags: [[ orange ]]
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. (Location 42)
Tags: [[ pink ]]
My favorite Wikipedia entry begins: “Ronald James Read was an American philanthropist, investor, janitor, and gas station attendant.” (Location 44)
Tags: [[ orange ]]
Ronald Read was patient; Richard Fuscone was greedy. That’s all it took to eclipse the massive education and experience gap between the two. (Location 71)
Tags: [[ orange ]]
financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know. (Location 80)
Tags: [[ orange ]]
I love Voltaire’s observation that “History never repeats itself; man always does.” It applies so well to how we behave with money. (Location 115)
Tags: [[ pink ]]
As investor Michael Batnick says, “some lessons have to be experienced before they can be understood.” We are all victims, in different ways, to that truth. (Location 156)
If you were born in 1970, the S&P 500 increased almost 10-fold, adjusted for inflation, during your teens and 20s. That’s an amazing return. If you were born in 1950, the market went literally nowhere in your teens and 20s adjusted for inflation. Two groups of people, separated by chance of their birth year, go through life with a completely different view on how the stock market works: (Location 174)
Before World War II most Americans worked until they died. That was the expectation and the reality. The labor force participation rate of men age 65 and over was above 50% until the 1940s: (Location 233)
More than a quarter of Americans over age 65 were classified by the Census Bureau as living in poverty until the late 1960s. (Location 237)
“Only a quarter of those age 65 or older had pension income in 1975.” Among that lucky minority, only 15% of household income came from a pension. (Location 240)
It was not until the 1980s that the idea that everyone deserves, and should have, a dignified retirement took hold. (Location 243)
The 401(k)—the backbone savings vehicle of American retirement—did not exist until 1978. The Roth IRA was not born until 1998. If it were a person it would be barely old enough to drink. (Location 245)
The share of Americans over age 25 with a bachelor’s degree has gone from less than 1 in 20 in 1940 to 1 in 4 by 2015.7 The average college tuition over that time rose more than fourfold adjusted for inflation. (Location 248)
Luck and risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort. NYU professor Scott Galloway has a related idea that is so important to remember when judging success—both your own and others’: “Nothing is as good or as bad as it seems.” (Location 262)
The cover of Forbes magazine does not celebrate poor investors who made good decisions but happened to experience the unfortunate side of risk. But it almost certainly celebrates rich investors who made OK or even reckless decisions and happened to get lucky. Both flipped the same coin that happened to land on a different side. (Location 337)
The line between “inspiringly bold” and “foolishly reckless” can be a millimeter thick and only visible with hindsight. Risk and luck are doppelgangers. This is not an easy problem to solve. The difficulty in identifying what is luck, what is skill, and what is risk is one of the biggest problems we face when trying to learn about the best way to manage money. But two things can point you in a better direction. Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming. (Location 375)
Therefore, focus less on specific individuals and case studies and more on broad patterns. (Location 385)
Bill Gates once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.” (Location 397)
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. Crime committed by those living on the edge of survival is one thing. A Nigerian scam artist once told The New York Times that he felt guilty for hurting others, but “poverty will not make you feel the pain.”13 What Gupta and Madoff did is something different. They already had everything: unimaginable wealth, prestige, power, freedom. And they threw it all away because they wanted more. They had no sense of enough. (Location 450)
There is no reason to risk what you have and need for what you don’t have and don’t need. (Location 462)
Modern capitalism is a pro at two things: generating wealth and generating envy. Perhaps they go hand in hand; wanting to surpass your peers can be the fuel of hard work. But life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations. (Location 471)
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. (Location 501)
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—often called margin of safety—is one of the most underappreciated forces in finance. It comes in many forms: A frugal budget, flexible thinking, and a loose timeline—anything that lets you live happily with a range of outcomes. (Location 697)
Effectively all of the index’s overall returns came from 7% of component companies that outperformed by at least two standard deviations. (Location 782)
Not only do a few companies account for most of the market’s return, but within those companies are even more tail events. In 2017, Amazon drove 6% of the S&P 500’s returns. And Amazon’s growth is almost entirely due to Prime and Amazon Web Services, which itself are tail events in a company that has experimented with hundreds of products, from the Fire Phone to travel agencies. (Location 799)
And who’s working at these companies? Google’s hiring acceptance rate is 0.2%.22 Facebook’s is 0.1%.23 Apple’s is about 2%.24 So the people working on these tail projects that drive tail returns have tail careers. (Location 804)
Napoleon’s definition of a military genius was, “The man who can do the average thing when all those around him are going crazy.” (Location 809)
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 in 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. (Location 827)
A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy. Tails drive everything. (Location 830)
When we pay special attention to a role model’s successes we overlook that their gains came from a small percent of their actions. That makes our own failures, losses, and setbacks feel like we’re doing something wrong. But it’s possible we are wrong, or just sort of right, just as often as the masters are. They may have been more right when they were right, but they could have been wrong just as often as you. (Location 866)
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. (Location 885)
But doing something you love on a schedule you can’t control can feel the same as doing something you hate. There is a name for this feeling. Psychologists call it reactance. Jonah Berger, a marketing professor at the University of Pennsylvania, summed it up well: People like to feel like they’re in control—in the drivers’ seat. When we try to get them to do something, they feel disempowered. Rather than feeling like they made the choice, they feel like we made it for them. So they say no or do something else, even when they might have originally been happy to go along.25 (Location 905)
When asked about his silence during meetings, Rockefeller often recited a poem: A wise old owl lived in an oak, The more he saw the less he spoke, The less he spoke, the more he heard, Why aren’t we all like that wise old bird? (Location 937)
If your job is to build cars, there is little you can do when you’re not on the assembly line. You detach from work and leave your tools in the factory. But if your job is to create a marketing campaign—a thought-based and decision job—your tool is your head, which never leaves you. You might be thinking about your project during your commute, as you’re making dinner, while you put your kids to sleep, and when you wake up stressed at three in the morning. You might be on the clock for fewer hours than you would in 1950. But it feels like you’re working 24/7. (Location 950)
In his book 30 Lessons for Living, gerontologist Karl Pillemer interviewed a thousand elderly Americans looking for the most important lessons they learned from decades of life experience. He wrote: No one—not a single person out of a thousand—said that to be happy you should try to work as hard as you can to make money to buy the things you want. No one—not a single person—said it’s important to be at least as wealthy as the people around you, and if you have more than they do it’s real success. No one—not a single person—said you should choose your work based on your desired future earning power. (Location 963)
Note: choices we make
The letter I wrote after my son was born said, “You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does—especially from the people you want to respect and admire you.” (Location 983)
We tend to judge wealth by what we see, because that’s the information we have in front of us. We can’t see people’s bank accounts or brokerage statements. So we rely on outward appearances to gauge financial success. Cars. Homes. Instagram photos. Modern capitalism makes helping people fake it until they make it a cherished industry. But the truth is that wealth is what you don’t see. (Location 1007)
Note: Net worth labels
The only way to be wealthy is to not spend the money that you do have. It’s not just the only way to accumulate wealth; it’s the very definition of wealth. (Location 1020)
Fever is almost universally seen as a bad thing. They’re treated with drugs like Tylenol to reduce them as quickly as they appear. Despite millions of years of evolution as a defense mechanism, no parent, no patient, few doctors, and certainly no drug company views fever as anything but a misfortune that should be eliminated. These views do not match the known science. One study was blunt: “Treatment of fever is common in the ICU setting and likely related to standard dogma rather than evidence-based practice.”36 Howard Markel, director of the Center for the History of Medicine, once said of fever phobia: “These are cultural practices that spread just as widely as the infectious diseases that are behind them.” (Location 1174)
Stanford professor Scott Sagan once said something everyone who follows the economy or investment markets should hang on their wall: “Things that have never happened before happen all the time.” History is mostly the study of surprising events. But it is often used by investors and economists as an unassailable guide to the future. (Location 1248)
This is not a failure of analysis. It’s a failure of imagination. Realizing the future might not look anything like the past is a special kind of skill that is not generally looked highly upon by the financial forecasting community. (Location 1314)
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 1320)
There are single venture capital funds today that are larger than the entire industry was a generation ago.40 In his memoir, Nike founder Phil Knight wrote about his early days in business: There was no such thing as venture capital. An aspiring young entrepreneur had very few places to turn, and those places were all guarded by risk-averse gatekeepers with zero imagination. In other words, bankers. (Location 1331)
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. 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 1342)
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. Harvard psychologist Daniel Gilbert once said: 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.48 (Location 1555)
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. (Location 1576)
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. (Location 1586)
“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.’”49 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 1596)
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 1619)
The result was that under Welch’s leadership, stockholders didn’t have to pay the price. They got consistency and predictability—a stock that surged year after year without the surprises of uncertainty. Then the bill came due, like it always does. GE shareholders have suffered through a decade of mammoth losses that were previously shielded by accounting maneuvers. The penny gains of Welch’s era became dime losses today. (Location 1667)
Market returns are never free and never will be. They demand you pay a price, like any other product. You’re not forced to pay this fee, just like you’re not forced to go to Disneyland. You can go to the local county fair where tickets might be $10, or stay home for free. You might still have a good time. But you’ll usually get what you pay for. Same with markets. 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. (Location 1686)
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. (Location 2150)
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. (Location 2153)
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. (Location 2156)
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. (Location 2160)
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. (Location 2162)
Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness. (Location 2167)
Be nicer and less flashy. No one is impressed with your possessions as much as you are. (Location 2170)
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. (Location 2172)
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. (Location 2175)
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. (Location 2178)
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 2181)
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 2183)
Define the game you’re playing, and make sure your actions are not being influenced by people playing a different game. (Location 2184)
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 2185)
Doctors] don’t die like the rest of us,” he wrote. “What’s unusual about them is not how much treatment they get compared to most Americans, but how little. For all the time they spend fending off the deaths of others, they tend to be fairly serene when faced with death themselves. They know exactly what is going to happen, they know the choices, and they generally have access to any sort of medical care they could want. But they go gently.” A doctor may throw the kitchen sink at her patient’s cancer, but choose palliative care for herself. (Location 2199)
Charlie Munger once said “I did not intend to get rich. I just wanted to get independent.” We can leave aside rich, but independence has always been my personal financial goal. (Location 2211)
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 2222)
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. I spend virtually all of my investing effort thinking about those three things—especially the first two, which I can control. (Location 2289)
