Psychology of Money - Morgan Housel

1. No one's crazy

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

   2. No amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty. You can read about what it was like to lose everything in the Great Depression. But you'll never feel it.

   3. If you grew up when inflation was high you invested less of your money in bonds later in life compared to those who grew up with an inflation was low. If you happen to grow up when the stock market was strong you invested more of your money in stocks later in life compared to those who grew up and stocks for a week.

2. Luck & Risk - How Bill Gates got rich

   1. Bill Gates went to one of the only high schools in America with a computer at the time. The odds of that - 300 million high school students in the world, 300 students in Lakeside high school. One in a million. If he didn't have access to a computer so young, Microsoft probably wouldn't have been created.

   2. Kent Evans was Bill Gates' best friend in school. Gates himself claimed Evans was much smarter than him. Gates went on to create Microsoft, Evans died in a mountaineering accident. Also a one in a million chance of occurring.

   3. What Gates experienced was one in a million luck, whilst Evans experienced one in a million risk.

3. Compounding

   1. Everyone thinks they know how Warren Buffett built his fortune. Few pay attention to the simplest fact: He's been a good investor since he was a child.

   2. But 99% of his wealth was accumulated after his 50th birthday. His skill is investing, but his secret is time. That's how compounding works.

   3. Jim Simons has, arguably, provided the best returns annually, compounding at 66% annually since 1988. Buffett has compounded at 22% annually, but for a lot longer. Jim Simons is still 75% less rich than Buffett.

4. The Importance of Staying Wealthy

   1. You need to have a survival mindset to stay wealthy. Anyone can accumulate wealth, but very few can keep it.

   2. We all know Buffett and Munger as the investing duo. But 40 years ago there was a third member, Rick Guerin. They all made investments together.

   3. Where is he now? During the 1973-74 downturn, Rick was levered with margin loans, and got margin calls. He had to sell his Berkshire stock to Warren.

   4. The three of them had an edge, but only Buffett and Munger could survive

5. Surprises

   1. Things that have never happened before happen all the time

   2. Importance of outlier events

      1. 9/11 prompted the fed to cut rates, which helped drive the housing bubble, which led to the financial crisis, which led to a poor jobs market, which led tens of millions to seek college education, which led to $1.6 trillion in student loans with an 11% default rate.

   3. The problem is that we use these events to guide our perspective of the worst case scenario. But those events had no precedent when they occurred.

   4. When we make a mistake, we tend to say "I'll never make this mistake again". But the correct lesson to learn from surprises is that the world is surprising.

6. Room for Error

   1. In a battle during WW2, 104 German tanks sat in reserve outside a city. When they were called for battle, fewer than 20 were operable. During the weeks of inactivity behind the front lines, mice entered the vehicles and ate the insulation covering the systems. The Germans had the most sophisticated equipment in the world. Yet they were defeated by field mice.

   2. "The purpose of the margin of safety is to render the forecast unnecessary" - Benjamin Graham

      1. Margin of safety is the only effective way to safely navigate a world that is governed by odds, not certainties.

   3. Solution: use room for error when estimating future returns. For Morgan's investments, he assumes the future returns will be 1/3 lower than the historic average. A buffer that is enough to let him sleep well at night.