“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.”

“…we think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance).”

“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

• Everyone has unique life experiences that have caused them to view money in different ways. You might think what they do is crazy (or dumb) but to them it makes perfect sense. They have a different mental model of how the world works than you do. It doesn’t have to do with how smart you are or they are, it has to do with life experiences and perspectives.
• Example: If you were born during the depression you are more likely to save a lot. If you were born during the 2000s you are more likely to invest a lot.
• In the grand scheme of history, personal finance and investing is relatively new. Nobody has a ton of experience and knows exactly what to do.
• People should theoretically make decisions based on math and spreadsheets but in reality they do it based on fear, doubt, social influences, impulses, greed, etc.

Luck and Risk

• Luck and risk are very important. Your individual efforts and decisions can only do so much. You’re playing in “a game with seven billion other people and infinite moving parts”.
• Luck is when factors outside of your control result in your success. Risk is the likelihood that you pursue something and it doesn’t lead to success. Luck can make a very risky situation successful. On the other hand, bad luck can make a minimally risky situation unsuccessful.
• Advice for dealing with luck vs skill
  • “Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.”
  • “…focus less on specific individuals and case studies and more on broad patterns.”

Never Enough

• “There is no reason to risk what you have and need for what you don’t have and don’t need.” – Warren Buffett
• Remember the following:
  • Stop moving the goalpost. Determine what “enough” is for you and once you’ve obtained it stop stressing about obtaining more and taking risks.
  • Comparing yourself to others will drive you to want more. Determine what your “enough” is.
  • “‘Enough’ is not too little.” – It’s exactly enough. You’re not leaving opportunity and potential on the table.
  • Reputation, freedom and independence, family and friends, being loved, happiness, etc. are things that you should never risk for potential gain

Confounding Compounding

• Small changes and little starting amounts can compound overtime to ridiculous amounts
• People are bad at thinking exponentially. People prefer to think linearly. Recognize that one of the most powerful financial tools you have is to invest your money and then just wait for it to compound. Not realizing this can lead you to make bad strategies and investment attempts that are less successful than just investing and waiting.

Getting Wealthy vs Staying Wealthy

• “…getting money and keeping money are two different skills. 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.”
• No matter your investment (money, career, business, etc.) you need to be able to stick around. You can’t play if you’re not in the game. Compounding only works if you are in the game for a long time.
• Survival is critical. Avoid being wiped out and losing everything at all costs.
• Three Factors Of The Survival Mindset
  • Desire to be financially unbreakable. Then you can stick around for compounding to work.
  • Plan for things to not go according to plan. You need Room for Error (Ex: “A frugal budget, flexible thinking, and a loose timeline”)
  • You should be optimistic that in the long term the market will go up but paranoid about all the crisis and unpredictable events along the way

Tails, You Win

• “Long tails” refer to the large amount of events that can occur at the edges of a normal distribution. These events are rare but they can be very rewarding or destructive.
• It’s normal for a lot of things to fail. No one does everything right all the time. Eventually something might go right. You can have a lot of not so great investments and just a few really good ones.
• “Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.” During these tail events you should just keep investing – don’t overreact and sell all your investments.

Freedom

• “Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time.”
• ” …a common denominator in happiness—a universal fuel of joy—it’s that people want to control their lives. The ability to do what you want, when you want, with who you want, for as long as you want, is priceless.”
• Reactance: People feel disempowered when you force them to do something because they don’t have a choice. This is why “…doing something you love on a schedule you can’t control can feel the same as doing something you hate.”

Man in the Car Paradox

• Paradox: People want wealth to be liked and admired. However, when you look at someone who’s wealthy you don’t like and admire them. Instead, you just think about how having their wealth would make you liked and admired.
• People want respect and admiration and they think expensive things will bring it but they don’t. Earn respect through your actions and behaviors – humility, empathy, kindness, etc.

Wealth is What You Don’t See

• The only thing you know about a person driving a $100,000 dollar car is that they paid $100,000 for a car. They might not be wealthy at all… maybe because of that car.
• People judge other’s wealth by what we can see (cars, clothes, etc.) but bank accounts, financial assets, retirement accounts, etc. are what really matter and they are hidden.
• The way to become a millionaire is to not spend money you have. – “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

• There are two sides of the wealth equation – how much you earn and how much you save. People put so much emphasis on the earning side and not enough on the saving side.
• Your savings rate is more important than your income rate. “Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more.”
• Determining what “enough” is for you and being happy with less money/things will help increase your savings rate. Don’t let your ego drive you to want more.
• There doesn’t need to be a specific reason to save. Save for the sake of saving. Save for the unpredictable things that could happen. Save for getting more control over your time.
• Savings that you don’t invest (0% interest) might seem crazy to some. To others it gives them peace of mind knowing it’s there and won’t fluctuate with the stock market. To others it gives them more flexibility to control their time and do what they want because they know they have money there.
• Having savings gives you the flexibility to do what others can’t. This can set you apart in a hyper-connected world where everyone is your competition.

Reasonable > Rational

• A rational person would do everything based on the formulas in their spreadsheets. However, this is unrealistic. Your goal should be to be reasonable.
• People want financial strategies that allow them to sleep at night and not worry about their money. This is irrational because their are more optimal strategies, but it’s reasonable.
• People invest a little bit of their money in their child’s startup. This is irrational, but reasonable.

Surprise!

• “Things that have never happened before happen all the time.” – Scott Sagan
• “…“historians as prophets” fallacy: An overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress.”
• “The correct lesson to learn from the surprises is that the world is surprising.” We don’t know what will happen next. Be prepared for them.
• Keep these two things in mind
  • If you rely too much on history then you might not be prepared for the outlier events that cause a lot of impact (Ex: WWII, Great Depression, Dot-Com Bubble, Sept. 11, etc.)
  • History doesn’t account for changes in the world today (Ex: Roth IRA and Venture Capital are relatively new things)
• Note: The book The Intelligent Investor is an amazing finances book but all the information is out of date. The author updated the book countless times because the old techniques stopped working.
• You shouldn’t completely ignore history. However, your takeaways should be more general the farther back you look. Things like greed, fear, and incentives about money don’t change over time, but specific techniques do.

Room for Error

• Plan for your plan not going according to plan. Plan for the worst to happen. (What if your stocks don’t earn as much as you think? What if you don’t get the raise? What if an emergency happens? What if you can’t save as much as you thought? Etc.)
• If you bet too heavily when things are looking good then you may lose everything if things unexpectedly go wrong.
• Increase the gap between what you think will happen and what can happen. The world is full of uncertainty, randomness, and chance. There are a lot of bad things that can happen that you don’t even know about
• “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.”
  • Example: Have enough cash (room for error) so you can endure anything bad in your stocks. This makes it so you won’t get wiped out if things go wrong.
• Some Room for Error Techniques: Emergency fund; keep some money in cash; take risks with some of your money but be very conservative with the other
• Avoid single points of failure (aka relying on one thing for something).
  • “The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.”
• Never take risks where the bad outcome wipes you out completely (ex: Russian roulette; taking on debt to invest more)

You’ll Change

• People are good at recognizing how much they’ve changed over time… but they are bad at realizing how much they could change in the future. Current financial goals you set now might not be ones that you want in the future
• Keep these two things in mind
  • Avoid any extremes in financial planning (ex: Don’t assume that your future self will be happy with a very low income and living in a tiny house). Try to keep a moderate amount of everything – savings, free time, commute time, time with your family, etc. This will help you avoid regret.
  • Accept that things change. Move on and change with it. (Ex: Don’t stay in a job you don’t like anymore. “I have no sunk costs” – Daniel Kahneman). Stop pursuing any financial goals that you don’t want to anymore.

Nothing’s Free

• Many things look easy until you actually start trying to do it. A lot of the costs (hardships) are not obvious until you actually are experiencing them
• The price of successful investing is the fear and regret that comes with the volatility of the market. People that try to avoid the price by frequently trading in and out tend to do poorly.
• Don’t think of a decline in the market as a fine or punishment. Think of it as an admission fee to get great returns over time from compounding.

You & Me

• Be careful when taking financial advice and when mimicking finance decisions of people around you. Other people have different goals and timelines that you don’t know about. Their actions may not work for your goals.
• Example: An asset starts doing really well. So a lot of short-term investors invest it in. So then it starts doing great. Now long-term investors invest. Then it declines a little and all the short-term investors pull out. It declines even more and now the long-term investors are left with nothing.

The Seduction of Pessimism

• People tend to focus on pessimism which makes the world seem a lot scarier than it really is. Dealing with this is part of the price you must pay to successfully invest and handle money. Growth is driven by compounding over time. Don’t be scared out of the market.
• Optimism is taken less seriously then pessimism. If someone says we’ll all be rich if you invest in a stock then people are likely to dismiss them. If someone says that a certain stock will crash in the near future then people are likely to investigate it thoroughly.
• Money affects a lot of people (more than 50% of Americans own stock). So hearing something bad about the market is likely to scare people.
• People forget that markets adapt. Bad conditions will eventually go back to normal and great conditions will also eventually go back to normal.
• Progress often happens slowly over time while setbacks can happen overnight. This is scary and makes people focus more on pessimism.

When You’ll Believe Anything

• Beware the tendency for people to believe things that are in alignment with what they desperately want to be true.
• When the stakes are high things become more believable (there is a magic pill that will make you resistant to a plague that’s killing millions; you just lost a lot of money and there is a new magic stock that’s predicted to increase rapidly) Investing is high stakes. With just a few stock picks you could become rich without even trying. This can lead people to adopting bad strategies and get-rich-quick schemes.
• Remember that there is a lot about the world that you don’t know, you don’t understand, or you can’t control. Nobody can know everything and control everything. However people often craft stories that make them seem more understandable. This is dangerous because you might completely misunderstand why something is really happening and then do a risky strategy that backfires.

Money Truths (Recap of Above Lessons)

• “Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong.”
• “Less ego, more wealth.”
• “Manage your money in a way that helps you sleep at night.”
• “If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.”
• “Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune…”
• “Use money to gain control over your time…”
• “Be nicer and less flashy.”
• “Save. Just save. You don’t need a specific reason to save.”
• “Define the cost of success and be ready to pay it.”
• “Worship room for error.”
• “Avoid extreme ends of financial decisions.”
• “You should like risk because it pays off over time.”
• “Define the game you’re playing…” (Don’t be influenced by others that have different goals)
• “Respect the mess.” (It’s all a mess – do what works for you)