Notes
A lot of these notes are inspired by Calvin Rosser.
Luck and risk
- Be careful of how you assess successful people and unsuccessful people. Luck and risk play a huge role in outcomes. Individuals at the top may have done things wrong but been the beneficiaries of luck, while those at the bottom may have done everything right and been the victims of risk.
- Instead of idolizing individual successful people, it’s better to look at the patterns of success themselves. These broad patterns stand the test of time and are supported by the law of large numbers. Certain individuals are very open about their paths to success.
- As a society, we tend to scrutinize those who ‘manufactured’ their successes, but they’re the ones whose patterns might best be followed to achieve success.
- For example, thinking about Joe Rogan. He talks a lot about how he never expected the success and influence he has now, because he started off just by doing what he thought was fun: talking to his friends for hours. Yes, he did the ‘right’ things (business-wise) and managed his growth well, and stayed true to his morals and beliefs, but he was also extraordinarily lucky. It might not be very smart to shoot for success by doing what he did, because for every Joe Rogan there are probably thousands or tens of thousands or even more people who never reached a fraction of his success.
Lessons from Buffet
“There is no reason to risk what you have and need for what you don’t have and don’t need.” — Warren Buffet
- Here Housel talks about the dopaminergic cycle of humans. Our goalposts are constantly moving, especially with quantifiable metrics like money. Once you have a million dollars, you compare yourself to the guy with $10 million. When you have $100 million, you want to be a billionaire. But back when your net worth was $100,000, you would have settled for $10 million any day of the year.
- This is related to Jordan Peterson’s rule in 12 Rules for Life: Compare yourself to who you were yesterday, not to who someone else is today.
- It’s okay to pursue money but it’s not okay to risk things you need for things you really don’t need. Make calculated decisions and hedge your bets, protect yourself. Prepare for intermittent failures and always stay true to who you are. You are always the aspirational person from when you started, not the hundred millionaire you may be now. Keep that in mind when risking what you have achieved for something you don’t need.
On calculated risks and the power of compounding:
“As I write this Warren Buffet’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.”
Getting money vs. keeping money
“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.”
- Getting money and keeping money require polar opposite skill sets. Getting money requires drive, optimism, and a risk-aligned mindset. Keeping money requires humility and a fundamental, deep understanding of how easy it is for everything to be taken away.
Cash is not the enemy
- Market downturns are a fact of life. The argument here is that holding a larger percentage of cash than usual is not a bad thing, and can actually lead to more success in the long term because of our psychological flaws. Essentially, if you’re 99% invested in the market with 1% in cash, and the market drops 25%, you’re psychologically more likely to panic sell than if you had 80% in the market and 20% in cash. In this way, you might actually end up with more per-dollar market time in the long run by investing less in the market. It’s a weird thought but it actually makes a lot of sense for most people.
- I guess the way around this is conquering the psychological barriers that prevent people from succeeding in market economies, hierarchies, performance-based competitions, and the financial industry in general. In doing so, you can recognize that you’re investing money you don’t need now, and you know that if the market never recovers (which it always has) you’ll have worse problems than your investment account.
Long tails
“Long tails – the farthest ends of a distribution of outcomes – have tremendous influence in finance, where a small number of events can account for the majority of outcomes.”
- 99% of the decisions we make don’t really have an impact on our financial outcomes. But those 1% of decisions—market downturns, speculative bubbles, etc.—make all the difference.
- 99% of people in the financial industry don’t have as much power as the 1%. Long tails make up so much of the world.
Warren Buffet
Warren Buffet has owned about 500 stocks during his life, but the majority of his money has been made on about 10 of them. Could he have known which 10? No. Similarly, the vast majority of market returns are earned on a tiny minority of trading days. Missing out on these trading days would cause an immense lack of portfolio performance. And, you can’t really know which days are the big ones. So, you have to be patient and let compounding do its work.
Highest form of wealth
“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.”
This is related to the ‘step back’ idea. Housel makes the point that the freedom of life is much more valuable than sacrificing life for more money. It’s a chicken and egg problem, but this one’s not a paradox. Understand what the value of money is in the first place—freedom and power. The power to effect change, and the freedom to live as you please.
Similar to this idea of getting money vs. keeping money, it’s important to remember that once your money is allowing you what you want it to allow you—freedom and power—why should you keep sacrificing what you have, need, and want, for what you don’t have and don’t need?
Stay true to your goals, morals, and beliefs.
Materialism and the fallacy of respect
This was one of the most insightful themes of the book. It’s a really deep one, and important to unpack.
Many people buy expensive things—cars, houses, apparel—because they want the respect and admiration of others (whether they admit it or even consciously know so). But what they fail to recognize is that those ‘others’ in supposed ‘admiration’ only feel as they do about the object itself, not he who bought it. As Housel describes it, they see themselves in the Ferrari.
Again, stay true to your goals, morals, and beliefs. Don’t spend money for the wrong reasons. Lavish purchases should only be made for the right reasons. Love the car and buy the car for what it is and how you truly feel about it.
Richness vs. wealth
Richness is short-term, wealth is long-term. Richness is income, money, cash balances. Wealth is time, power, freedom, investments, people, a plan.
The optimal portfolio
The optimal portfolio is one that allows you to sleep at night. It allows you to generate reasonable returns, while also maximizing your quality of life and control over your life. It will stand the test of tough recessions and other blips in the road. Most academic understandings of the ideal portfolio ignore the very real human factors that come into play and that may cause you to deviate from the strategy. — from Calvin Rosser.
Leaving room for error
This is a really important one. A few crucial points emerge thus far: the ridiculous power of compounding and the nature of long-tailed outcomes.
“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.”
How do you win in a game where compounding is key?
Time. Time is the key to compounding. In order to survive long enough to experience the benefits of compounding, you have to manage your risk. That entails leaving room for error. You can’t plan for everything to go exactly according to plan, because that’s impossible. And will result in you being knocked out of the game early.
We make plans in advance. These plans seem logical and thought through, but they often fail to account for our psychological states when in the middle of the plan. For example, planning to pursue a new business after quitting a day job. You may work out how much time you have to get it working before you have to give up. But, once you get relatively close to your doom, you’ll likely start to lose hope and consider giving up early to be ‘responsible’.
Make plans that account for your impending psychological states. Plan for intermittent failures, and make sure to leave enough room for yourself to survive them.
The price of investing
The price of long-term investing isn’t dollars. It’s psychological. Volatility, fear, greed, doubt, uncertainty, regret, and FOMO are examples of that which can ruin an investor or inadvertently bring about her demise.
In order to survive, you have to be willing to pay that price. Know how to navigate the moments when they arise, and that’s all psychological. In many cases, costs are far more expensive when priced psychologically as opposed to in dollars.
Play the right game
“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.”
This one goes along with Lessons from Buffet and Jordan Peterson’s rule in 12 Rules for Life: Compare yourself to who you were yesterday, not to who someone else is today.
People play different games. They have different morals, beliefs, goals, targets, timeframes, and skill sets. If someone else is succeeding in their own game, it does not mean they’re doing some right and you’re doing something wrong. Similarly, if someone is playing your game and failing, it does not necessarily mean that the game is at fault. Though this case would be cause for analysis.
As other people talk about their tactics and results, keep in mind the game they’re playing, and how it differs to the one you’re playing.
Pessimism is too persuasive
When things aren’t working, pessimistic claims sound highly logical and rational. That’s obvious, but the point Housel makes is that problems bring about solutions and create a demand for innovation and change. This type of result is something that only an optimist would believe in, he says.
Be aware of when you’re thinking about a failure in a pessimistic fashion as opposed to seeing the value in the situation. There is always value in a failure, though it may not be visible at first.
The problem with hindsight
This one is related to Thinking in Bets.
It’s easy to come up with reasons and explanations for events that occurred in the past. You have all the information and craft a narrative that seems to fit the training data and the testing data (results).
But, uncertainty prevails in this world, and we never know exactly what’s going to happen. In the heat of the moment, you strive to make calculated decisions with the understanding that you’re playing a game of probabilities. Once you’ve made your decisions, the dice have been rolled.
Investment results
- If you evaluate the performance of your portfolio based on your individual positions and decisions, you will exaggerate the brilliance of your outperformers and feel too much regret over your losers.
- This goes with the fat tails idea, and time in the market (most market returns are made on a small minority of all trading days).
- Some decisions are not algorithmically rational. At the end of the day, everyone’s human, so unless you’re being chastised by your own trading bot, understand that it’s okay to make decisions for the sake of psychology.
- The law of diminishing returns absolutely applies in this field. Stick with your morals and beliefs, and remember why you’re in the game in the first place. This goes with the ideas above: richness vs. wealth and the highest form of wealth. Money brings about freedom and power (with the best connotations). The ability to do what you want, when you want, with who you want, and the ability to effect real and progressive change.
- Buffet said “it’s not worth sacrificing what you have and need for what you don’t have and don’t need.” It’s not worth giving up the progress you’ve made for something that is totally irrelevant or unnecessary.