The Psychology of Money Book Excerpt

Original link: https://www.ixiqin.com/2023/08/05/psychology-of-money-notes/

Chapter 2 Luck and Risk

You need to be careful not to attribute 100% of the results of something to personal efforts and decisions
So, the trick to preventing failure is: do a good job of your financial planning so that it will not collapse because of one bad investment and missed financial goals, and ensure that you can continue to move forward on the investment road until good luck strikes Moment.

Chapter 3 Never Enough

Contentment means knowing that its opposite—perpetually insatiable desire—will push you toward regret.
It seems to me nothing more than the feeble apology of a man who is desperately trying to restore his reputation, which he knows is gone forever. Reputation is priceless. Freedom and independence are priceless. Family and friends are priceless. The love and affection you hope for from someone is priceless. Happiness is priceless. The best way to keep these is to know when to stop taking risks before you hurt them. Know how to stop when you should.

Chapter 4 The Compound Interest Mystery

But a good investment does not necessarily mean the highest long-term return, because high-return investments are often one-off and difficult to repeat. A good investment is one that produces consistently good returns that can be repeated over time—and this is where compound interest comes into play.

Chapter 5 Getting Rich vs. Staying Rich

Getting rich requires an adventurous spirit, optimism, and the courage to give it a go. But staying rich requires doing the exact opposite of taking risks. Keeping rich requires humility and awe, and you need to know how quickly wealth comes and how easy it is to go. Staying rich requires thrift and acknowledging that some of your wealth comes from luck, so don’t expect to replicate past success infinitely.
Why is the idea of survival first important to wealth? There are two reasons. The first reason is obvious: no gain is worth the risk of losing everything. The second reason is the seemingly counterintuitive compound interest discussed in Chapter 4. The power of compound interest will only emerge if wealth is given time to grow year after year
The security of wealth is more important than huge returns. As long as the fortune is safe, you know you’ll always get the most bang for your buck, because compound interest works wonders if you stick with it long enough.
Planning is important, but the most important part of every plan is preparing for the unexpected
A balanced mindset of being optimistic about the future while always being on the lookout for factors that stand in your way to a better future is crucial.

Chapter 6 Victory at the Tail

Anything huge, lucrative, famous, or influential has its origins in some tail event—one out of thousands or even millions of events. Most of our attention is focused on these things, the consequences of tail events. And when our focus is only on the outcome of the tail event, it is easy for us to underestimate the scarcity and power of the tail event itself
“It’s not whether you’re right or wrong,” George Soros once said, “it’s how much you make when you’re right, or how much money you make when you’re wrong. How much do you lose.” You can be wrong half the time and still win in the end.

Chapter 7 Freedom

The advice that those who have experienced the vicissitudes of life can give you is: time freedom is the biggest bonus that wealth can bring you.

Chapter 9 Wealth is what you can’t see

What good is wealth if it is money that you don’t use? Well, let me tell you why we save money.

Chapter 12 Surprise!

But investing is not a hard science. Investing, by its very nature, is the act of a large group of people making imperfect decisions based on limited information about things that will have a huge impact on their well-being in their lives, and this can make even the smartest people nervous, Greed and paranoia.
The cornerstone of economic theory is the principle that “things change over time”, because the invisible hand of the market does not like to see things that are too good or too bad persist. Investor Bill Bonner once described the way “Mr. Market” works: “He wears a ‘Capitalism at Work’ T-shirt and holds a sledgehammer. “Very few things last forever, and that means we can’t use history as prophecy.
Your takeaway from the unexpected should be this: The unexpected happens every day. We shouldn’t use past events as a guide to future possibilities; what we should do in the face of the unexpected is admit that we don’t know anything about what will happen in the future.

Chapter 13 Fault Space

The wisdom of acting with room for error consists in acknowledging the existence of uncertainty, randomness, and probability—”everything unknown”
“The purpose of a margin of safety is to make forecasting unnecessary.”

Chapter 14 People Can Change

Charlie Munger once said that the first rule of compound interest is: Never interrupt the process unless absolutely necessary. But when your life goals change, how can your plans related to financial management—such as your career planning, investment, consumption, financial budget, etc.—not change accordingly? It’s hard not to change.

Chapter 15 There is no such thing as a free lunch

Everything in the world has a price. Therefore, in the face of many things related to money, the key is to know what they require from you, and then judge whether you are willing to pay for them. The problem is that the price of many things is not on the surface. You will only know how much it is after you experience it for yourself, but by then, it will be too late.
There is a price to be paid for investment success that we cannot immediately see. It will not be visually written on the label. So, when you need to pay this kind of bill, you feel that the money is not the price you pay for something nice, but more like a fine you have to pay for something wrong. While paying bills is seen as normal, paying fines is something that should be avoided, so people feel that they should take certain sensible precautions to avoid penalties. A fine, whether it’s from the traffic police or the IRS, means you did something wrong and should be punished, so for those who see their wealth dwindling and think it pays a fine, avoiding possible future fines is nothing more than Just a natural reaction.
This seemingly trivial perspective of seeing market volatility as a price to pay rather than a penalty to pay is an important part of developing the right financial mindset. This mentality can allow you to stick to a financial strategy long enough to eventually obtain long-term investment returns.

Chapter 16 Everyone’s situation is different

An iron law in the financial field is: money will chase the maximum return. If a financial asset has good longevity—it’s been rising for a while—then there’s nothing wrong with short-term investors thinking the trend will continue. It certainly won’t go up forever, but as long as it keeps going up for as long as they need it to. And this upward momentum is attracting short-term investors in a logical way.
Bubbles form not because people are irrationally engaging in long-term investments, but because people are somewhat rationally turning to short-term trading in pursuit of snowballing positive momentum.
The lesson we should take away from this is this: When it comes to money, few things are more important than knowing what your own investment goals are and not being influenced by the activities and behavior of others.

Chapter 17 The Seduction of Pessimism

For most people, staying optimistic is the best choice, because the world is getting better and better for most people most of the time.
Whether you’re interested or not, there are two topics that affect your life: money and health. Health issues tend to be personal, while money issues are more systemic. In a tightly interconnected system, one person’s decisions often affect everyone else. Therefore, it is not difficult for us to understand why financial risk has received more attention and discussion than other topics.
Pessimists often fail to take into account how the market will adjust to the situation when they speculate on future trends.
Progress happens too slowly to be noticed, but setbacks occur too quickly to be ignored.
Growth is driven by compound interest, and compound interest usually takes time. Destruction can be caused by independent fatal factors, which can happen in a short time; it can also be caused by a loss of confidence, which can collapse in an instant.
Articles expressing a pessimistic tone are easier to write because the content tends to be more fresh and only needs to focus on recent events. Optimistic narratives need to look back at long histories and how things have developed, and people tend to forget these things, and it takes a lot of effort to connect the scattered facts.
If your expectations are too high, the best outcome under current conditions will look mediocre to you. Pessimism lowers expectations about things, closing the gap between possible outcomes and the best you can hope for.

Chapter 18 When You Believe Everything

It may seem crazy, but if you desperately need a solution, and you don’t know or can’t easily find an effective solution, the course of least resistance for you at this time is to be like Hajaj – anything give it a try. Not only are you willing to try, but you believe in it all.
Many investment ideas in the financial field have this characteristic: once you follow them and choose a certain strategy or method, you are investing both money and psychology at the same time.
One side is what you hope to achieve, and the other side is what you actually need to achieve in order to achieve an acceptable result. The greater the difference, the less likely you are to buy into compelling investment stories.
Motivation is a powerful motivator. We should always remember how it affects our financial goals and expectations. This sentence always has its truth: in the financial field, the room for error tolerance is the most important force, and the higher the risk, the greater the room for error tolerance should be.
Carl Richards, author of The Behavioral Gap, writes: “Risk is what you miss when you think you’ve thought it through.”
Kahneman once cited the situations where stories make us misunderstand reality: ● When making plans, we will focus on what we want to do and what we can do, while ignoring the plans and abilities of others, but the decisions of others will also affect the results. ● Whether explaining the past or predicting the future, we focus on the causal role played by skill and ignore the important influence of luck. ● We focus on what we know and ignore what we don’t know, which makes us overconfident in our thinking.

Chapter 19 Summary

Things are not that simple. Medical care is a complex industry, and the interaction between doctors and patients is also a complex process.
Be humble when things are going in the right direction, and be understanding or sympathetic when things are going in the wrong direction. This is because nothing is as good or bad as it seems. The world is big and complex. Luck and risk are real and hard to tell, so keep that in mind when evaluating yourself or others. If you can respect the power of luck and risk, it will be easier to focus on the things you can really control, and it will be easier to find the right reference objects.
The less vanity, the more wealth. How much money you can save depends on the gap between your need to express yourself and your income, and wealth exists precisely where you can’t see it. So it can be said that by reducing what you can buy today, you create the opportunity to buy more or have more choices in the future, and this is how wealth is accumulated. No matter how much you earn, if you can’t limit your desire to spend money on pleasure in the moment, you’ll never build wealth.
Manage your money in a way that lets you sleep soundly. This is not the same as aiming for the highest return on investment or putting a certain percentage of your income in the bank. Some people only sleep soundly after earning the highest rate of return, while others only sleep soundly when investing conservatively. Everyone has their own preferences, but asking yourself, “Will this help me sleep well at night?” can be the universal yardstick for deciding whether financial decisions are right for you.
If you want to improve your return on investment, the easiest and most effective way is to stretch the time. Time is the most powerful force in investing. It allows the trivial to grow and the effects of major mistakes to fade away. It doesn’t offset luck and risk, but it makes the outcome fairer for the participants.
Even if many things go wrong, don’t lose your mind. You can be half wrong and still accumulate wealth because a few things determine the overall outcome. No matter how you’re managing your money, no matter how much things don’t turn out as expected, it’s not a big deal. This is the way the world is. Therefore, you should always evaluate your performance by measuring your overall investment performance, not by the success or failure of a single investment. It’s perfectly acceptable, and in most cases even the best, to have a lot of bad investments and a few good ones at the same time. Judging overall performance by individual investments exaggerates the ingenuity of the winners and casts a harsh light on the losers.
Use wealth to gain control over time, because the most serious and common penalty for life happiness is lack of freedom in time. The ability to do what you like with the people you like at any time and for as long as you want is the greatest bonus that wealth can bring to you.
More goodwill, less luxury. No one else cares as much about your wealth as you do. You may think you need a fancy car or a fancy watch, but maybe what you really want is respect and admiration from others. You can probably get these more easily through kindness and humility than by relying on fancy cars and fancy watches.
save money. Just save it. There is no specific reason to save money. Saving for a car, down payment, or sudden illness is great, but it’s also one of the best reasons to save for things that can’t be predicted or defined. Everyone’s life is made up of a series of accidents. During life’s worst moments, a generous savings with no specific purpose can provide a hedge against the inevitable surprises.
Identify the price to pay for success. Then be prepared to pay because nothing of value comes for free. Remember that most of the costs involved in managing your finances are not priced. Uncertainty, doubt and regret are common costs in the financial world. They’re usually worth your while, but think of them as a fee (to be paid to get something nice) rather than a penalty (to be avoided at all costs).
Pay attention to room for error. There is a distance between what might happen in the future and what you need to meet in order to perform well. It is what gives you the resilience that allows compound interest to work its wonders over time. Room for error often seems like a conservative defense, but if it keeps you in the game, it pays for your mistakes countless times over.
Avoid setting extreme financial goals. Everyone’s goals and desires change over time. As you grow and improve as a person, the more extreme your past decisions are, the more likely you are to regret them.
You should like risk because it pays you off in the long run. But you need to be extra sensitive to destructive risk, because it can get you out of the game early, and you won’t have the opportunity to take risks that will pay you back.
Be clear about the nature of the game you are playing. Make sure your actions are not influenced by players of different games.
Treat everyone with respect. In the field of financial investment, smart, knowledgeable, thoughtful people may have differences of opinion. Because the goals and desires of different people are very different, there is no uniform correct answer. The best is the one that suit for you.

Chapter 20 My Financial Plan

It’s not necessarily a bad thing when others advise you to do things differently than they do themselves. This phenomenon just goes to show that there is no one-size-fits-all answer when it comes to dealing with complex issues involving emotional factors that affect you and your family.
The main secret is to control your desires and live as frugally as you can. Autonomy is not about your income level, but about your savings rate. And when your income exceeds a certain level, your savings rate is determined by controlling your desire for lifestyle.
If there’s one part of my family financial planning that I’m proud of, it’s the decision we made at a young age that our lifestyle desires don’t rise with income. Our saving rate is quite high, but we rarely feel that this frugality is achieved by suppressing desires, because our desire for material things has not increased much. That’s not to say we don’t have desires. We also love beautiful things and a comfortable life. We just don’t allow our life goals to inflate without limit.
Autonomy is our highest goal. An added benefit of maintaining a below-mean lifestyle is that it prevents you from feeling competitive. Live comfortably within what you can afford, without excess desire, and you’ll avoid the enormous social pressure many people in the modern Western world are under.
Nassim Taleb explains: “True success is true success by withdrawing from the rat race and regulating your behavior toward inner peace.” I love this quote
Charlie Munger said: “The first rule of compound interest is: Never interrupt the process unless absolutely necessary.

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