Umarbek

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.

The more I studied and wrote about the financial crisis, the more I realized that you could understand it better through the lenses of psychology and history, not finance.

To grasp why people bury themselves in debt you don't need to study interest rates; you need to study the history of greed, insecurity, and optimism.

Your personal experiences with money make up maybe 0.00000001% of what's happened in the world, but maybe 80% of how you think the world works.

The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty.

Spreadsheets can model the historic frequency of big stock market declines. But they can't model the feeling of coming home, looking at your kids, and wondering if you've made a mistake that will impact their lives.

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 live paycheck-to-paycheck and saving seems out of reach. Buying a lottery ticket is the only time in our lives we can hold a tangible dream of getting the good stuff that you already have and take for granted. We are paying for a dream, and you may not understand that because you are already living a dream.

Few people make financial decisions purely with a spreadsheet. They make them at the dinner table, or in a company meeting. Places where personal history, your own unique view of the world, ego, pride, marketing, and odd incentives are scrambled together into a narrative that works for you.

The entire concept of being entitled to retirement is, at most, two generations old.

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.

Dogs were domesticated 10,000 years ago and still retain some behaviors of their wild ancestors. Yet here we are, with between 20 and 50 years of experience in the modern financial system, hoping to be perfectly acclimated.

Nothing is as good or as bad as it seems.

Bill Gates went to one of the only high schools in the world that had a computer. One in a million high-school-age students attended the high school that had the combination of cash and foresight to buy a computer. Bill Gates happened to be one of them.

For every Bill Gates there is a Kent Evans who was just as skilled and driven but ended up on the other side of life roulette.

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.

"What do I care about the law?" Vanderbilt once said. "Ain't I got the power?" He did, and it worked. But it's easy to imagine those being the last words of a story with a very different outcome.

Benjamin Graham wrote about his GEICO bonanza: "One lucky break, or one supremely shrewd decision, can we tell them apart?" Not easily.

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 extreme ends of luck or risk.

Bill Gates once said, "Success is a lousy teacher. It seduces smart people into thinking they can't lose."

Failure can be a lousy teacher, because it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk.

At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, "Yes, but I have something he will never have … enough."

There is no reason to risk what you have and need for what you don't have and don't need.

The hardest financial skill is getting the goalpost to stop moving.

It gets dangerous when the taste of having more, more money, more power, more prestige, increases ambition faster than satisfaction. In that case one step forward pushes the goalpost two steps ahead.

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.

The ceiling of social comparison is so high that virtually no one will ever hit it. Which means it's a battle that can never be won, or that the only way to win is to not fight to begin with.

"Enough" is realizing that the opposite, an insatiable appetite for more, will push you to the point of regret.

The only way to know how much food you can eat is to eat until you're sick. Few try this because vomiting hurts more than any meal is good. For some reason the same logic doesn't translate to business and investing.

It is not necessarily the amount of snow that causes ice sheets but the fact that snow, however little, lasts.

More than 2,000 books are dedicated to how Warren Buffett built his fortune. But few pay enough attention to the simplest fact: Buffett's fortune isn't due to just being a good investor, but being a good investor since he was literally a child.

Warren Buffett's net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday.

His skill is investing, but his secret is time. That's how compounding works.

If James Simons had earned his 66% annual returns for the 70-year span Buffett has built his wealth he would be worth sixty-three quintillion nine hundred quadrillion seven hundred eighty-one trillion seven hundred eighty billion seven hundred forty-eight million one hundred sixty thousand dollars.

None of the 2,000 books picking apart Buffett's success are titled This Guy Has Been Investing Consistently for Three-Quarters of a Century. But we know that's the key to the majority of his success.

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.

There's only one way to stay wealthy: some combination of frugality and paranoia.

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.

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.

Compounding only works if you can give an asset years and years to grow. It's like planting oak trees: A year of growth will never show much progress, 10 years can make a meaningful difference, and 50 years can create something absolutely extraordinary.

"Charlie and I always knew that we would become incredibly wealthy. We were not in a hurry to get wealthy; we knew it would happen. Rick was just as smart as us, but he was in a hurry."

Nassim Taleb put it this way: "Having an 'edge' and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs."

A good plan doesn't pretend this weren't true; it embraces it and emphasizes room for error. The more you need specific elements of a plan to be true, the more fragile your financial life becomes.

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.

Forty percent of all Russell 3000 stock components lost at least 70% of their value and never recovered. Effectively all of the index's overall returns came from 7% of component companies that outperformed by at least two standard deviations.

Anything that is huge, profitable, famous, or influential is the result of a tail event, an outlying one-in-thousands or millions event.

Napoleon's definition of a military genius was, "The man who can do the average thing when all those around him are going crazy." 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.

Peter Lynch is one of the best investors of our time. "If you're terrific in this business, you're right six times out of 10," he once said.

When I start a tour, it's not like I start out in arenas. Before this last tour I performed in this place in New Brunswick called the Stress Factory. I did about 40 or 50 shows getting ready for the tour.

At the Berkshire Hathaway shareholder meeting in 2013 Warren Buffett said he's owned 400 to 500 stocks during his life and made most of his money on 10 of them. Charlie Munger followed up: "If you remove just a few of Berkshire's top investments, its long-term track record is pretty average."

"It's not whether you're right or wrong that's important," George Soros once said, "but how much money you make when you're right and how much you lose when you're wrong."

The highest form of wealth is the ability to wake up every morning and say, "I can do whatever I want today."

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.

Money's greatest intrinsic value, and this can't be overstated, is its ability to give you control over your time.

Doing something you love on a schedule you can't control can feel the same as doing something you hate.

I had a day job in midtown Manhattan paying $20k per year. My cost of living was about $1000/month, and I was earning $1800/month. Once I had $12,000 I could quit my job and become a full-time musician. I was free. The difference happened when I was 22.

Rockefeller's product, his deliverable, wasn't what he did with his hands, or even his words. It was what he figured out inside his head.

If the operating equipment of the 21st century is a portable device, this means the modern factory is not a place at all. It is the day itself.

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.

When you see someone driving a nice car, you rarely think, "Wow, the guy driving that car is cool." Instead, you think, "Wow, if I had that car people would think I'm cool."

You might think you want an expensive car, a fancy watch, and a huge house. But 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.

Wealth is what you don't see.

Someone driving a $100,000 car might be wealthy. But the only data point you have about their wealth is that they have $100,000 less than they did before they bought the car.

Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined.

"Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?"

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.

Exercise is like being rich. You think, "I did the work and I now deserve to treat myself to a big meal." Wealth is turning down that treat meal and actually burning net calories.

There are, of course, wealthy people who also spend a lot of money on stuff. But even in those cases what we see is their richness, not their wealth.

It's difficult to learn from what you can't see. Which helps explain why it's so hard for many to build wealth.

The United States uses 60% less energy per dollar of GDP today than it did in 1950.

Wealth is just the accumulated leftovers after you spend what you take in.

Past a certain level of income, what you need is just what sits below your ego.

When you define savings as the gap between your ego and your income you realize why many people with decent incomes save so little.

Only saving for a specific goal makes sense in a predictable world. But ours isn't. Saving is a hedge against life's inevitable ability to surprise the hell out of you at the worst possible moment.

Savings without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce. It gives you time to think. It lets you change course on your own terms.

What is the return on cash in the bank that gives you the option of changing careers, or retiring early, or freedom from worry? I'd say it's incalculable.

In a world where intelligence is hyper-competitive and many previous technical skills have become automated, competitive advantages tilt toward nuanced and soft skills, like communication, empathy, and, perhaps most of all, flexibility.

Aiming to be reasonable instead of rational is one more people should consider when making decisions with their money.

Academic finance is devoted to finding the mathematically optimal investment strategies. My own theory is that, in the real world, people do not want the mathematically optimal strategy. They want the strategy that maximizes for how well they sleep at night.

A rational investor makes decisions based on numeric facts. A reasonable investor makes them in a conference room surrounded by co-workers you want to think highly of you, with a spouse you don't want to let down.

If lacking emotions about your strategy or the stocks you own increases the odds you'll walk away from them when they become difficult, what looks like rational thinking becomes a liability.

There are few financial variables more correlated to performance than commitment to a strategy during its lean years.

Invest in a promising company you don't care about, and you might enjoy it when everything's going well. But when the tide inevitably turns you're suddenly losing money on something you're not interested in.

Things that have never happened before happen all the time.

Investing is not a hard science. It's a massive group of people making imperfect decisions with limited information about things that will have a massive impact on their wellbeing, which can make even smart people nervous, greedy and paranoid.

Richard Feynman, the great physicist, once said, "Imagine how much harder physics would be if electrons had feelings." Well, investors have feelings.

Fifteen billion people were born in the 19th and 20th centuries. But try to imagine how different the global economy, and the whole world, would be today if just seven of them never existed.

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.

Whenever we are surprised by something, even if we admit that we made a mistake, we say, 'Oh I'll never make that mistake again.' But, in fact, what you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That's the correct lesson to learn from surprises: that the world is surprising.

Graham was constantly experimenting and retesting his assumptions and seeking out what works, not what worked yesterday but what works today.

The twelve most dangerous words in investing are, 'The four most dangerous words in investing are, 'it's different this time.'"

The further back in history you look, the more general your takeaways should be.

A rule of thumb is that you should have at least a hundred basic units.

The purpose of the margin of safety is to render the forecast unnecessary.

People underestimate the need for room for error in almost everything they do that involves money.

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.

Bill Gates said he "came up with this incredibly conservative approach that I wanted to have enough money in the bank to pay a year's worth of payroll even if we didn't get any payments coming in."

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.

"The best way to achieve felicity is to aim low," says Charlie Munger.

You can be risk loving and yet completely averse to ruin.

Leverage is the devil here. Leverage, taking on debt to make your money go further, pushes routine risks into something capable of producing ruin.

To get around this, I think of my own money as barbelled. I take risks with one portion and am terrified with the other.

During the weeks of inactivity behind the front lines, field mice had nested inside the vehicles and eaten away insulation covering the electrical systems.

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.

An underpinning of psychology is that people are poor forecasters of their future selves.

All of us are walking around with an illusion, an illusion that history, our personal history, has just come to an end, that we have just recently become the people that we were always meant to be and will be for the rest of our lives.

Charlie Munger says the first rule of compounding is to never interrupt it unnecessarily.

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.

"I have no sunk costs."

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.

Everything has a price, and the key to a lot of things with money is just figuring out what that price is and being willing to pay it.

Every job looks easy when you're not the one doing it because the challenges faced by someone in the arena are often invisible to those in the crowd.

Like most products, the bigger the returns, the higher the price. Netflix stock returned more than 35,000% from 2002 to 2018, but traded below its previous all-time high on 94% of days.

Many people in investing choose the third option. Like a car thief, though well-meaning and law-abiding, they form tricks and strategies to get the return without paying the price.

The Money Gods do not look highly upon those who seek a reward without paying the price.

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.

Thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor.

Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long term to mostly short term.

Bubbles do their damage when long-term investors playing one game start taking cues from those short-term traders playing another.

When a commentator on CNBC says, "You should buy this stock," keep in mind that they do not know who you are.

It's hard to grasp that other investors have different goals than we do, because an anchor of psychology is not realizing that rational people can see the world through a different lens than your own.

Few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.

Real optimists don't believe that everything will 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.

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.

A constant drumbeat of pessimism usually drowns out any triumphalist song.

"I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage."

There is an iron law in economics: extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways.

Assuming that something ugly will stay ugly is an easy forecast to make. And it's persuasive, because it doesn't require imagining the world changing. But problems correct and people adapt.

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.

It's easier to create a narrative around pessimism because the story pieces tend to be fresher and more recent.

Expecting things to be great means a best-case scenario that feels flat. Pessimism reduces expectations, narrowing the gap between possible outcomes and outcomes you feel great about.

In 2009 we inflicted narrative damage on ourselves, and it was vicious. It's one of the most potent economic forces that exists.

"When you have no money, and your son is sick, you'll believe anything."

If you desperately need a solution and a good one isn't known or readily available to you, the path of least resistance is toward willing to believe anything.

Give someone the chance of investing alongside "the next Warren Buffett" and they'll believe with such faith that millions of people will put their life savings behind it.

The bigger the 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.

Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.

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 when it doesn't make sense.

We all want the complicated world we live in to make sense. So we tell ourselves stories to fill in the gaps of what are effectively blind spots.

"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.

NASA's New Horizons spacecraft trip to Pluto was 99.99998% accurate. But astrophysics is a field of precision. It isn't impacted by the vagaries of human behavior and emotions, like finance is.

The idea that patients may also be entitled to sharing the burdens of decisions with their doctors was never part of the ethos of medicine.

I can't tell you what to do with your money, because I don't know you. I don't know what you want. I don't know when you want it. I don't know why you want it.

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.

Be nicer and less flashy.

Define the cost of success and be ready to pay it.

Worship room for error.

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.

Define the game you're playing, and make sure your actions are not being influenced by people playing a different game.

"What do you own, and why?"

Half of all U.S. mutual fund portfolio managers do not invest a cent of their own money in their funds.

What works for one person may not work for another. You have to find what works for you.

"I did not intend to get rich. I just wanted to get independent."

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.

Our "independence fund."

If there's a part of our household financial plan I'm proud of it's that we got the goalpost of lifestyle desires to stop moving at a young age.

Comfortably living below what you can afford, without much desire for more, removes a tremendous amount of social pressure that many people in the modern first world subject themselves to.

"True success is exiting some rat race to modulate one's activities for peace of mind."

The independent feeling I get from owning our house outright far exceeds the known financial gain I'd get from leveraging our assets with a cheap mortgage.

Good decisions aren't always rational. At some point you have to choose between being happy or being "right."

Cash is the oxygen of independence.

"The first rule of compounding is to never interrupt it unnecessarily."

I'm saving for a world where curveballs are more common than we expect.

Every investor should pick a strategy that has the highest odds of successfully meeting their goals.

I can afford to not be the greatest investor in the world, but I can't afford to be a bad one.

There is little correlation between investment effort and investment results.

The world is driven by tails, a few variables account for the majority of returns.

The economic facts of the years between the early 1970s through the early 2000s were that growth continued, but became more uneven, yet people's expectations of how their lifestyle should compare to their peers did not change.

Expectations always move slower than facts.

A culture of equality and togetherness that came out of the 1950s–1970s innocently morphs into a Keeping Up With The Joneses effect.

Household debt-to-income stayed about flat from 1963 to 1973. Then it climbed, and climbed, and climbed, from around 60% in 1973 to more than 130% by 2007.

The Tea Party, Occupy Wall Street, Brexit, and Donald Trump each represents a group shouting, "Stop the ride, I want off."

"The more the Internet exposes people to new points of view, the angrier people get that different views exist."

History is just one damned thing after another.