Short Summary
Doing well with money has a little to do with how smart you are and more to do with your behaviour around money. You don’t have to be a STEM genius to be good with money.
Main Takeaways
Luck vs Skill
There will never be a story of a janitor outperforming the world’s top scientists, surgeons or software engineers. So why is it possible that average joes can outperform professionals in the money game?
Because financial success is not a hard science. To an extent, financial outcomes (both successful and unsuccessful) are driven by luck, independent of intelligence and effort of the investor.
Engineers can figure out why a bridge collapse. It’s a lot harder to figure out why a financial market collapsed.
No One’s Crazy
People want predictability. So they form their own narratives. And because everyone has their own unique experiences, narratives on how the world works vary wildly.
Someone who grew up dirt poor has vastly different ideas of risk vs reward compared to the son of a banker.
So when you think someone is behaving bonkers with their money, they’re just acting in line with their world view and doing what makes sense for them.
Luck & Risk
Both luck and risk are hard to measure. And even harder to accept.
Few successful people attribute their position to luck. You’re more likely to hear how hard they worked or how much they sacrificed. Which may be true, don’t get me wrong. But luck plays a huge role.
But risk and luck look awfully alike. ↓
Countless fortunes (and failures) owe their outcome to leverage.
The best (and worst) managers drive their employees as hard as they can.
“The customer is always right” and “customers don’t know what they want” are both accepted business wisdom.The line between “inspiringly bold” and “foolishly reckless” can be a millimetre thick and only visible with hindsight.
Bad outcomes don’t mean bad decisions were made. Just as good outcomes don’t mean good decisions were made.
There are often more relevant lessons in learning from broad observations, than in studying the extreme ends of success and failure.
The key with financial failure is to ensure it doesn’t wipe you out so you can keep playing the game until the cards fall in your favour.
Never Having Enough
There’s danger in never having enough. People can have it all, wealth, power, status, yet risk it and throw it all away beacuse they wanted more.
Key ideas in the never enough argument:
1. The hardest financial skill is getting the goalposts to stop moving
One step forward pushes the goalposts two steps ahead. So to catch up to the moving goalposts you take on more risk.
2. Social comparison is the problem
“There’s always a bigger fish”. Comparison is the thief of all joy. So run your own race.
3. “Enough” is not too little
“Enough” is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret.
4. There are many things never worth risking, no matter the potential gain.
Happiness, family and friends, your reputation, freedom and being loved by those who you want to love you are all invaluable.
So know when to stop taking risks that might harm those things. Know when you have enough.
There is no reason to risk what you have and need for what you don’t have and don’t need.
Compounding
Compounding is the eighth wonder of the world. Don’t underestimate it. Of Warren Buffett’s $80+ billion net worth, 99% was accumulated after his 50th birthday.
Successful investing isn’t just hitting home runs and earning out of this world returns. It’s about sticking around for the long run and letting your money compound. It ain’t sexy, but it works.
Getting Wealthy vs. Staying Wealthy
There’s a million ways to get rich. But really only one way to stay rich, a combination of frugality and paranoia.
In general, when trying to get rich you’re taking risks and really putting yourself out there.
But to hold onto your wealth, there’s a certain fear that whatever you’ve worked for will be taken away. A humility that some of your success is attributable to luck, meaning that what’s worked in the past for you may not work in the future.
A barbelled personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.
Compounding only works if you give it the time to grow. If you keep taking risks and blow yourself halfway through, it’s all for nothing.
“Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.”
Nassim Nicholas Taleb
Tails, You Win
Give yourself a chance to win and take advantage of long tails.
The best investors don’t get 90% of their investments right. You’re probably a great investor if you’re right 50% of the time. Because a few successful winners will drive returns.
Even Jim Simons’ Medallion fund, which has generated average annual returns of close to 70% before fees since 1988, only profits on around 50% of their trades. And they’re probably the best ever!
J.P. Morgan found that the Russell 3000’s overall returns were driven by 7% of the component companies.
Investing is not a field where you have to be perfect all the time. You just have to give yourself ample chances and take advantage of the long tails.
Freedom
Having the ability to do what you want, when you want, is the ultimate form of wealth.
Don’t get caught in the never-ending loop of earning more then spending more. And don’t let the allusion of wealth control you.
Use money to control your time and do things you want to do.
Man in the Car Paradox
You see a Ferrari on the street. No one looks at the driver. No one gives a rats ass about the driver. They just want to be the driver.
There’s a common desire to be wealthy and own expensive things. But people just want the respect and admiration they think comes with it.
But expensive items won’t bring respect and admiration. Especially from the people who you want it from most.
Wealth is What You Don’t See
Outward appearances don’t show the whole picture. Someone can seem rich, but it’s impossible to know at a glance. Don’t be tempted by those who flaunt wealth.
It seems stupid saying it, but the only way to accumulate wealth is to not spend it. Being rich means not spending money.
Also being rich ≠ being wealthy.
Rich is a current income. It’s driving expensive cars and living in big homes that a large income requires.
Wealth is hidden. It’s the income earnt and not spent. The delayed gratifcation.
Wealth is like an iceberg, it’s mostly below the surface.
Save Money
You don’t have to earn more income to increase your savings. You can just reduce your ego.
Savings give flexibility. Flexibility to go at your own pace, to learn things you want to learn, wait for the best opportunities. These only happen if you save.
A great post that suits this takeaway is Mr Money Moustache’s “The Shockingly Simple Math Behind Early Retirement“.
Reasonable > Rational
An investment strategy may be rational and make perfect economic sense, but if it isn’t reasonable, it’s much harder to follow.
Rationally it may make sense to invest 100% of your savings in index funds. But if you find it too hard (or too boring) to stick to, it may be reasonable to give yourself 20% to invest in individual stocks.
Be reasonable rather than rational. You’re human. Reasonable is more realistic.
Beware of Surprises
Just because it hasn’t happened before, doesn’t mean it can’t happen.
Hard sciences behave predictably and consistently over time. Chemicals react the same as 100 years ago. The laws of physics don’t change.
But investing is not a hard science. It’s a result of human decisions and emotions, thus imperfect.
As mentioned earlier, tails drive results. The majority of what’s happening at any given moment in the global economy can be tied back to a handful of past events that were nearly impossible to predict. History books can’t prepare you for what surprises will drive the future.
Don’t ignore history. But the further back you study, the more general the takeaways should be.
History can be a great guide and teacher. But history is not a perfect predictor in investing. You can’t prepare for what you can’t envision.
Room for Error
Failure comes from failure to imagine failure.
Every investment won’t be a winner. So how much will you stand to lose if things go wrong? If your portfolio consists of one stock, you’re not leaving much room for error, are you?
Think about card counting. Statistically, it’s proven to work. But there’s no guarantee you’ll win every hand. So you must plan accordingly and should things not always go your way.
The downside of certain situations are not worth the upside. If something is successful 95% of the time but the 5% leads to ruin, no amount of upside is worth taking that bet.
“You can be risk loving and yet completely averse to ruin.
Nassim Nicholas Taleb
Good ideas taken too far are indistinguishable from bad ideas.
You’ll Change
People change over time. Meaning your goals are likely to as well.
Imagine what your life goals were like at 5 years old? Then at 10 years old? Or goals at 15, 20, and 25 years old? Things change, you change.
People naturally underestimate how much they will change in the future.
So avoid operating at extreme ends of the financial planning spectrum. If you think you’ll be happy the rest of your life on little income, or working extreme hours in pursuit of a high income, chances are you’ll regret it someday. And the downsides might be no retirement savings or missed time with family and friends.
Given the power of compounding, it’s best if you have a manageable plan and stick to it.
Embrace the fact that you and your goals will change. If you plan accordingly it might help minimize future regret.
Nothing’s Free
The cost of things may not be obvious right away. Because things are harder in practice than in theory. Successful investing looks easy when you’re not the one doing it.
Monster Beverage returned 319,000% from 1995 to 2018—among the highest returns in history—but traded below its previous high 95% of the time during that period.
High returns come at a cost, the never-ending taunt of giving returns but taking them away just as fast
A good example is the hidden costs is GE stock. For a while shareholders didn’t pay their price for holding, they got consistency and predictability in a share price that kept rising. Only later did it come out that numbers weren’t quite what they reported to be and shareholders paid their price.
In short, deal with market volatily. Accept & embrace it. There’s no free lunch in investing.
You, Me & Incentives
Show me the incentives and I will show you the outcome.
Incentives rule the world whether you like it or not. So be wary when taking advice from others. What’s their incentive? Why are they helping?
Not everyone is playing the same game in investing. I’m 24 and fresh out of Uni. When Hedge Fund managers say what they’re buying, why should I care? I’m in a totally different financial position than they are. They could be chasing quarterly performance. Here I am starting my retirement nest egg.
Run your own race.
The Seduction of Pessimism
Optimism isn’t believing that believe that everything will always be great. That’s complacency. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way.
But pessimism is seductive. It seems smart. It’s easy to default to pessimism. I was guilty as a kid of expecting bad outcomes in order to always be pleasantly surprised. But it’s taxing and a tad depressing sometimes.
Pessimistic stories are more appealing than optimistic ones. Just look at the news.
While only 6% of crime in Great Britain is violent crime, a study of 10 popular British dailies showed that more than 2/3 of the crime news is devoted to violent crime
Pessism is seductive. Source
But you’re choosing to invest, so you’re optimistic that the future will be better than today. So keep in mind the seductiveness of pessimism whilst being aware it’s optimism that drives returns.
You might like my post, “Why are Investors so Pessimistic?“.
When You’ll Believe Anything
Stories are more appealing than statistics.
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.
Confirmation bias. You’ll like stories that you want to be true. If you’re a pessimist you’ll tend to read doom and gloom articles.
2. Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.
You don’t know what you don’t know. So you’ll fill gaps in your knowledge through the mental models that you do know.
People make up crazy stories of why the stock market is behaving the way it is. But what if you just accept the fact you’re not quite sure? And that there are millions of participants in the market so it’s hard to pinpoint why anything happens really. But people want to fill in the gaps. Not knowing is scary.
“We need to believe we live in a predictable, controllable world, so we turn to authoritative-sounding people who promise to satisfy that need.”
Philip Tetlock
Favourite Quotes
In what other industry does someone with no college degree, no training, no background, no formal experience, and no connections massively outperform someone with the best education, the best training, and the best connections?
Since it’s hard to quantify luck and rude to suggest people’s success is owed to it, the default stance is often to implicitly ignore luck as a factor of success.
Personal Thoughts
Overall a pretty good book! I’ve read a bit of Morgan’s writing before, so had high expectations for the book. Whilst I did recognise some parts from previous blog posts, there was enough new content and stories to make it worthwhile.
7.5/10
Interested? Buy the book from Amazon.
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