This is one of those books which I randomly picked off, thanks to Amazon suggestions and what a journey it has been reading this over the last couple of weeks. This is one of those books that’s a breeze to reach and understand. The language is simple. The ideas common but profound, and the author has done a great job on the brevity aspect.
My review of this book will contain the takeaways from each chapter.
No One’s Crazy
Your personal experiences with money make up maybe 0.00000001% if what’s happened in the world, but maybe 80% of how you think the world works.
We often are very judgmental of other people’s behavior with money. Buying a lottery ticket is stupid? Maybe not for people who dream of living a live that you and I live. Think that people are too scared to take risks with crypto or stock? Often, their life experiences determine their risk appetite. The point is, people in this world have very personal experiences which are similar from a macro lens, but very different from a more micro perspective. These micro level events determine the behavior of people with their money.
So most actions people take with their money – could be gambling, buying lottery tickets, blowing it off on parties or even saving at the expense of comfort, are a result of their experiences. And each of these behaviors is justified to them, while it may look crazy to an outsider. No one is trying to act crazy, it’s all justified.
Luck & Risk
Nothing is as good or bad as it seems.
The primary takeaway from this chapter for me was the fact that luck has a very large role to play in the outcomes in our life, a lot more than we realize because we like to take credit for any positive outcome and usually blame an external event in case of a negative outcome. On the other hand, every decision we take has an element of risk attached to it. Nothing worth pursuing comes with 0% risk. The difference between who is features of the cover page of the Forbes magazine is often the difference between who ended up on the fortunate and unfortunate side of risk.
For every Bill Gates and Elon Musk out there, there’s someone equally brilliant but just ended up on the unfortunate side of risk with little luck to favor. While it isn’t to say that we should not work hard and try to be smart about the decisions we take, but what’s to realize here is that things are largely out of our control. This is very humbling and lets you stay in the game for long.
When rich people do crazy things.
The realization here is that no amounts of money is ever enough. Rich people often do things that risk their entire wealth and reputation to be able to keep upgrading their net worth. Someone with a $100k annual income will always want to earn $1 million. A millionaire will want to get into the tens millionaire club, who would want to get into the hundred millionaire club, and so on.
A large number of people throughout history have taken risks just to upgrade which have potentially destroyed their reputation and wealth, because no amount of money is ever enough.
One of the hardest financial skills is getting the goalpost to stop moving. Have truly enough money is life changing, whatever maybe the amount. Easier said than done, and social comparison is the problem here. And with Instagram, Twitter, TikTok etc., its easier to compare ourselves to others and to feel inadequate, all the time. So much so that you will never truly be happy, no matter how much effort you put in to make that money.
$81.5 billion of Warren Buffet’s $84.5 billion net worth came after his 65th birthday. Our minds are not built to handle such absurdities.
One of the most commonly discussed yet barely understood things is compounding. With compounding at play, you do not need tremendous force to create tremendous results. A little growth over a long enough period of time can result in outcomes that seem suddenly surprising. This is very difficult for our minds to process as it seems 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 Buffet maybe a phenomenal investor. But the real key to his success isn’t his investing acumen, but time. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him.
Getting Wealthy vs. Staying Wealthy
Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.
Gathering wealth and protecting it requires different skill sets. The former requires an ability to identify opportunities and take risks, whereas the latter is more about frugality and paranoia.
Tails, You Win
You can be wrong half the times and still make a fortune.
It’s all about the power law. To win and be successful, you need to give yourself enough time and chances. Most major wins, come in a very few number of cases. For example: a majority of returns for a VC fund come from less than 5% of the companies they invest in. To ensure you have a shot at winning, the answer is to simply give yourself a large number of shots and manage your resources (time/effort/energy) in a way where it gives you the opportunity to have enough shots.
Controlling your time is the highest dividend money pays.
Wealth and money should be viewed as tools to allow you to do whatever you want, without having to work for money. With enough money, you can buy this freedom of doing whatever you want. In essence, this allows you the feeling of having control over you life, which is corelated to high levels of happiness. So in essence, money buys you freedom, which gives you happiness! Money = happiness, but not in the material way most people think.
Man in the Car Paradox
No one is impressed with your possessions as much as you are.
When you see someone driving a nice car, you rarely think “Wow, the guy driving the car is cool.” Instead, you think, “Wow, if I had that car people would think I’m cool.” This is the paradox. People want wealth and the ability to buy fancy stuff to be able to signal to others. But what ends up happening is, people use your wealth as a benchmark for their own desire to signal to others (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.
When you see someone owning an expensive car etc., we tend to think that the person in rich and wealthy. But the irony is, that person is poorer by the value of the car. A large number of people, use up significant percentage of their net worth to signal their wealth via fancy cars, big houses etc.
The only factor you can control generates one of the only thing that matters.
Building wealth has little to do with your income or investment returns, and lots to do with your savings rate. As savings rate is something which is directly in your control as opposed to returns, this has a higher likelihood to making you rich.
Reasonable > Rational
Aiming to be mostly reasonable works better than trying to be coldly rational.
The reality is, we are not spreadsheets or bots. We are people, irrational and emotional. Something that gets overlooked: Do not aim to be coldly rational when making financial decisions. Aim to be pretty reasonable, which is more realistic and you have a better chance of sticking through it in the long run, which is what matters most when managing money.
History is the study of change, ironically used as a map of the future.
It’s hard to predict future events. Even if you spend a lot of time studying history in any specific field, things that have never happened before happen all the time. A few events in history shape the future events in a massive way, but can’t be predicted. For example, the book talks about how 9/11 resulted in the 2008 recession via a series of events, which was totally impossible to predict in advance.
The key lesson is to always have the humility to be surprised by events.
Room for Error
The most important part of every plan is planning on your plan not going according to plan.
When dealing with money, accounting for enough room for error will always make things easy. The wisdom in having room for error is acknowledging that uncertainty, randomness and chance 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.
Long-term planning is harder than it seems because people’s goals and desires change over time.
The important takeaway here is that what you imagine you want in the future will most likely change when you get to that point in the future. While long term financial planning is essential, but things change – both the world around you and your own goals and desires. When things change, it’s always a good idea to avoid the extreme ends of financial planning. Assuming you will be happy with a very low income or choosing to work endless hours in pursuit of a high one, increases the odds that one you will find yourself at a point of regret.
Nothing is Free
Everything has a price, but not all prices appear on labels.
The key to a lot of things with money is just figuring out what that price is and being willing to pay it. The problem is that the price of a lot of things is not obvious until you have experiences them firsthand, when the bill is overdue.
For example: the S&P 500 increases 119x in the 50 years ending 2019. All you had to do was to sit back and let you money compound. But of course, successful investing looks easy when you are not the one doing it. Like everything, successful investing demands a price. But the currency is not dollars, it’s volatility, fear, doubt, uncertainty and regret- all of which are easy to overlook until you are dealing with them in real time.
You & Me
Beware taking financial cues from people playing a different game than you are.
The key takeaway here is that everyone’s circumstances are different and financial advice that suits you may not entirely suit my circumstances. So when you listen to someone giving advice that may sound amazing, always think it that makes sense you to and your circumstances.
The Seduction of Pessimism
Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.
Optimism is the best bet for most people because the world tends to get better for most people most of the time. But pessimism is special. Not only is it more common, but also sounds smarter, is intellectually captivating and it’s paid more attention than optimism.
When you’ll Believe Anything
Appealing fictions and why stories are more powerful than statistics
Stories come in all shapes and sizes with all kinds of narratives. 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. And, given that everyone has an incomplete view of the world, we use stories to form a complete narrative to fill in gaps. The interesting part is, while stories can be very convincing, most of them are far away from reality, hard facts and data.
That’s it folks! This is a summary that I hope to revisit in the future to revise my own learnings. I have tried to keep this post very brief, you will find a lot more examples and explanations in the book.
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