The Psychology of Money

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. — Fresh Factory, Infinium, Wonder, Sensei, what else? Bitcoin, IA Ventures, Green Thumb, what else?

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.” Enough. I was stunned by the simple eloquence of that word—stunned for two reasons: first, because I have been given so much in my own life and, second, because Joseph Heller couldn’t have been more accurate.

The hardest financial skill is getting the goalpost to stop moving. But it’s one of the most important. If expectations rise with results there is no logic in striving for more because you’ll feel the same after putting in extra effort.

As I write this Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s. The real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him. Buffett began serious investing when he was 10 years old. By the time he was 30 he had a net worth of $1 million, or $9.3 million adjusted for inflation. Effectively all of Warren Buffett’s financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years. His skill is investing, but his secret is time.

But part of the reason this happens is because 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.

noting that some VC firms succeed for five or ten years, but Sequoia has prospered for four decades. Rose asked why that was: Moritz: I think we’ve always been afraid of going out of business. Rose: Really? So it’s fear? Only the paranoid survive? = Put this quote up along with others

The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. This should be the cornerstone of your strategy, whether it’s in investing or your career or a business you own. 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. A barbelled personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.

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.

“The great investors bought vast quantities of art,” the firm writes.19 “A subset of the collections turned out to be great investments, and they were held for a sufficiently long period of time to allow the portfolio return to converge upon the return of the best elements in the portfolio. That’s all that happens.” The great art dealers operated like index funds. They bought everything they could. And they bought it in portfolios, not individual pieces they happened to like. Then they sat and waited for a few winners to emerge. That’s all that happens.

[Go through portfolio. Preservation. Option (ie cash). Skew (returns)]

J.P. Morgan Asset Management once published the distribution of returns for the Russell 3000 Index—a big, broad, collection of public companies—since 1980.21 Forty percent of all Russell 3000 stock components lost at least 70% of their value and never recovered over this period. Effectively all of the index’s overall returns came from 7% of component companies that outperformed by at least two standard deviations. That’s the kind of thing you’d expect from venture capital. Even among public utilities the failure rate is more than 1 in 10:

[Buy when there is blood on the streets. Also add buffet quote.]

If you’re a good business leader maybe half of your product and strategy ideas will work. 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.

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.

“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.” You can be wrong half the time and still make a fortune.

The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.” But if there’s 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. It is the highest dividend money pays. The most powerful common denominator of happiness was simple. Campbell summed it up: 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. … with the people you want to,

you realize that aligning money towards a life that lets you do what you want, when you want, with who you want, where you want, for as long as you want, has incredible return.

But wealth is hidden. It’s income not spent.

[Keep your costs low.]

People with enduring personal finance success—not necessarily those with high incomes—tend to have a propensity to not give a damn what others think about them.

But my favorite summary of the theory came when he mentioned in an interview that “the purpose of the margin of safety is to render the forecast unnecessary.” It’s hard to overstate how much power lies in that simple statement.

For my own investments, which I’ll describe more in chapter 20, I assume the future returns I’ll earn in my lifetime will be ⅓ lower than the historic average. To get around this, I think of my own money as barbelled. I take risks with one portion and am terrified with the other.

[Rules. Don’t buy individual stocks? Buckets safe and beta. Returns and alpha. Don’t ever be situation where only funded of last resort.]

The main thing I can recommend is going out of your way to identify what game you’re playing. I wrote out “I am a passive investor optimistic in the world’s ability to generate real economic growth and I’m confident that over the next 30 years that growth will accrue to my investments.”

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. Optimistic narratives require looking at a long stretch of history and developments, which people tend to forget and take more effort to piece together.

Saving money is the gap between your ego and your income, and wealth is what you don’t see.

But the foundation of, “does this help me sleep at night?” is the best universal guidepost for all financial decisions. 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.

It is fine to have a large chunk of poor investments and a few outstanding ones. That’s usually the best-case scenario. Judging how you’ve done by focusing on individual investments makes winners look more brilliant than they were, and losers appear more regrettable than they should.

Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness. The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance.

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.

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. 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.

“What do you own, and why?” [Go through your portfolio and answer these questions]

Charlie Munger once said “I did not intend to get rich. I just wanted to get independent.”

Either way, I’ve shifted my views and now every stock we own is a low-cost index fund. Every investor should pick a strategy that has the highest odds of successfully meeting their goals. And I think for most investors, dollar-cost averaging into a low-cost index fund will provide the highest odds of long-term success.