In the following videos, you will learn timeless lessons on wealth, greed and happiness.
Have you heard the story about Ronald Read, the janitor that had 8 million dollars in savings when he died in 2014? Yes, you heard that right. Janitor. $8 millions.
And he didn´t win the lottery or inherit the money either. He just saved consistently throughout his life, while letting the wonders of compounding do its thing.
And he didn´t win the lottery or inherit the money either. He just saved consistently throughout his life, while letting the wonders of compounding do its thing.
“Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.”
Spend your next ten or fifteen minutes on this video, and you might excel on the soft skill of investing!
This is a top 5 takeaways summary of The Psychology of Money, by Morgan Housel, presented by the Swedish Investor.
Top 5 Takeaways
1. Pay the Price
Let´s say you want a new, nice, watch. You go to the store to check out the offerings. You are really after something that will impress your friends and the lovely lady you are dating.
You now have a choice: either pay for the watch, or steal it and run because you have done your cardio, right?
My guess is that you would choose option number one – no matter your physical capacity. You would take out your card and swipe that thing; do the right thing.
The point is that you know that having a new watch comes with a price, a fee. And it’s just the same with investing; it comes with a price too.
Throughout the videos on this channel, there are some reoccurring takeaways for high returns; one of them being a somewhat concentrated portfolio with Peter Lynch perhaps being the exception.
The concentrated portfolio brings with it a characteristic to your performance; it will be volatile. This is the price, the fee, for having high returns in the stock market over the long-term.
If you don’t have the stomach to stay the course when your net worth decreases by, say, 20% during a single week, as two of your major holdings report quarterly earnings below what analysts expected, don’t aim to maximize your returns; because the higher the returns, the higher this fee typically is.
Let´s say you already 10 years ago could visualize Netflix’ bright future. You invested a large portion of your net worth in the stock. Well, then you would be quite a rich person today!
However, could you afford paying the price for this journey? Netflix has, during this period, had many major downturns.
Would you have sat still in that boat during 2011 when Netflix lost tons of customers, and the stock price fell 80% from its peak during the ensuing months?
Your portfolio returns would look terrible. What would you tell your spouse and your kids? Could you stomach facing them knowing that you might just have endangered their future? Would you still think that being almost all-in Netflix is a good idea?
This is of course an extreme example, but even if you have something less extreme than an all-in Netflix approach to investing, you’ll have to pay the price of volatility nonetheless.
Let’s say that you bought an S&P 500 index fund in 1980. You’d still have to face about 13 years combined when your investment portfolio was down 20% from its high. And about 8 months when it was down 50%. That’s tough!
Stock-market investing is a great thing, that enables wealth creation like few other options. But don’t try to fool yourself – it doesn’t come for free.
All investors will experience volatility; and you have to look at it as the price you pay for a brighter future.
2. Never Enough
It’s a very interesting phenomenon that you can hand somebody a $2 million bonus, and they’re fine until they find out that the person next to them got 2-million-1, and then they’re sick for the next year.
Capitalism is great at doing two things: generating wealth and generating envy.
The urge to surpass your neighbours, peers, and friends, can help energize your hard work and strive to really “make it”.
And of course, being motivated into becoming more productive and doing meaningful work is a good thing, but social comparison can also cause us to feel like we’re never enough.
Let’s look at some statistics. To belong to the top 1% highest income earners in the US, you’d have to earn somewhere around $500,000 a year.
That’s what a highly specialized doctor, let’s call him Bill, earns, and by almost any standard, Bill would be considered rich. He can afford to drive nice cars, go on long vacations to exotic countries, perhaps hire someone to do work which he thinks is tedious, etc.
Bill has been feeling good about himself and what he has achieved financially in his life.
Well, that was until he bought a vacation home in the Hamptons and realized that he had Stan as his neighbour.
Stan belongs to the top 1% of the 1%. He is a CEO of a quite large public company, and earns a staggering $10 million per year.
Now, you’d hope that at least Stan would be satisfied with his financial achievements, but nope! This guy was a childhood friend of Michael Jordan, and this all-time great basketball player is someone who belongs to the 1% of the 1% of the 1%.
And well, compared to Michael’s fortune of about $2b, Stan’s yearly salary of $10m suddenly seems like peanuts.
Does it end here? Well no, it doesn’t. Because Michael occasionally attends parties with celebrities where a guy named Jeff Bezos shows up.
Bezos is in the top 1% of the 1% of the 1% of the 1% and he increased his net worth by about $75b in 2020, now sitting at something like $200b.
There’s always a bigger fish.
The type of envy which has emerged from comparisons of this kind has caused a lot of people to do foolish things throughout history.
Some have leveraged their portfolios to the teeth in order to move up to a higher pyramid, just to lose it all and then commit suicide.
Some have acted on insider information and lost both their personal reputation and then later their freedom when they’ve gone to jail.
Many have forsaken their families and then had their partners leaving them or cheating on them (or both) as a result.
By watching this channel and learning on how to become a successful investor; chances are that you will at some point reach a level of financial freedom that the average Joe can only dream about.
But you need to, at some point, accept that enough is enough.
We will not trade something that we have and need for something that we don’t have and don’t need, even if we’d kind of like to have it.
3. Crazy is in the Eye of the Beholder
At a first glance, it seems like a lot of people do crazy things with their money. Some spend it in ridiculous amounts on ridiculous items, and others hide it under their mattresses.
But the thing to remember is that people come from different backgrounds with different childhoods, different parents, different life experiences and different educations.
All this adds up to different perspectives and values. What seems crazy to you might make total sense for me.
Morgan uses the example of lottery tickets in the book: the lowest income households in the US spend more than 400 dollars per year on the lottery. This is 4 times more than the average in the highest income group.
Combine this with the fact that more than a third of Americans cannot come up with 400 dollars for an emergency. Do these people spend their emergency buffer on lottery tickets?
Seems crazy, doesn’t it? But again; we don’t have the same perspective as individuals.
Try to see it from their perspective; they live paycheck to paycheck, with little room to save money, they often lack education and thus a nice career trajectory. They can’t afford a nice vacation or a new car, and they can’t put their children through college without a mountain of debt.
Buying a lottery ticket is their way of buying into the dream that many of us already live. That is why they buy more lottery tickets than we do. Not so crazy after all perhaps?
So, how does this make you a better investor?
For one thing, by acknowledging that we are different, we become less tempted to copying an investment portfolio or strategy which doesn’t suit our own goals.
For example, our own risk-profile might be higher than a billionaire, as our own focus is more on the “getting rich part”, and not so much about “staying rich”. Copying the billionaire’s portfolio might be suboptimal for your goals.
Acknowledging differences can also help us to say no more easily to investments that are outside our own circle of competence.
Take Gamestop for example. As I am not a trader, I didn’t participate in this drama at all. It is simply not my card to play.
Understanding different peoples’ perspectives, or at least that there are different lenses to see the world through, will help you make better sense of our society and lead you on the path that is yours.
4. Peek-A-Boo
What does the Great Depression, World War II, the financial crises and Covid-19 all have in common?
Nassim Taleb, who is one of my favourite authors, would refer to these event as Black Swans.
The definition of a Black Swan is that:
1. It’s an outlier. Nothing that has happened before can convincingly point to even the possibility of the event.
2. It carries an extreme impact.
3. It becomes explainable after the fact.
Human nature fools us into believing that we should have been able to know it would happen all along.
Imagine it is Black Monday 1987. How would you have reacted to the market losing almost one fourth of its value in one day?
Would you have been one of the individuals that shouted: “SELL! SELL!” or would you have been able to weather the storm, perhaps putting in additional chips which you’ve kept on the side lines?
Here’s an interesting fact:
If you invested in the S&P 500 index 20 years ago, but you missed out on the 4 best performing stock market days, you’d have a 164% return instead of 291%. That’s quite a big difference.
The moral of this takeaway is that it is more useful to prepare yourself, both mentally and financially, for a disaster which you cannot foresee than hoping that you’re able to react before everyone else.
Stop listening to macro projections, the things that will cause big fear among the investment community in the future are the things that are unlikely to be foreseen anyways.
5. The Seduction of Pessimism
If I were to give you a bunch of reasons to why the market will crash later this year, mentioning the gigantic US governmental debt, that stimulus checks may lead to the return of inflation, and perhaps something about new strains of Covid-19; you would most likely be intrigued, and perhaps end up with quite a negative view of where in the market cycle that we are at the moment.
Were I instead to give you examples of why things probably will continue to get better, by showing how life expectancy is rising, how sustainable energy is getting cheaper or how computing power is exploding, you would most likely just shrug your shoulders and not think twice about it.
We all know that the pessimistic person sounds so very intelligent, and the optimist sounds naïve in comparison; why is that?
Daniel Kahneman, the author of Thinking Fast and Slow, says asymmetry towards loss and listening to pessimists is an evolutionary trait;
“When directly compared or weighted against each other, losses loom larger than gains. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.”
We tend to listen to pessimists more carefully, not only for evolutionary reasons, but also because progress happens much slower than setbacks do.
Progress rarely happens overnight, but setbacks often does.
Because tragedies and setbacks happen during much shorter time-periods, its much easier to create an intriguing and persuading story around it, and thus it receives more attention.
To create an optimistic story about the future, we must look at longer tie-horizons. This often becomes more vague and less dramatic.
Knowing that you will perhaps be more fascinated by a pessimist, and less so by an optimist, can perhaps help you becoming less asymmetric towards it in the future.
The world is better than you think.
- You are not going to get rich in the stock market without paying the price of volatility.
- Envy is the worst of the seven deadly sins.
- Never risk what you have and need for what you don’t have and don’t need.
- Different perspectives cause different courses of actions to be reasonable or rational.
- Instead of trying to foresee disasters prepare yourself mentally and financially so that you can survive them.
- Be careful when taking investment advice. Understand that pessimism appeals more to your survival instincts than optimism does.
In the following video by Productivity Game, you’ll learn how to correct three money misunderstandings and strengthen your investing psychology.
Key Takeaways
"I did not intend to get rich. I just wanted to get independent."
Master The 3 Money Misunderstandings
1. Compounding
- $2 on January 2nd
- $4 on January 3rd
- $8 on January 4th
May that be a $100 or $10,000 and keep that money invested so you give compounding enough time to work its magic.
But know this: in any 20 year period, 100% of people who bought and held the S&P 500 stock market index made money.
We all must develop the mental fortitude to weather short-term downturns in order to benefit from long-term uptrends and leverage the power of compounding.
2. Volatility
Volatility refers to the daily swings in the market.
Stocks have high volatility because on any given day a stock portfolio can be up or down a few percent.
People who can’t handle the emotional ups and downs of the stock market or other volatile markets invest in low volatility assets like treasury bonds and guaranteed investment contracts to achieve a steady return, but no low volatility asset will outperform a volatile stock market over an extended period.
Some investors believe that they can get high annual returns without volatility. That’s why several people happily gave millions of dollars to a man on Wall Street who claimed he could generate a steady 1% return each month with no downside risk.
That man was Bernie Madoff. A con man who ran a ponzi scheme and took everyone’s money
Volatility is the emotional price you need to pay if you want good annual returns.
If you’re invested in an index like the S&P 500, which constantly adds growing companies to replace dying companies, you can be confident that the long-term trajectory of that index is up and to the right, regardless of how much volatility the index experiences in any given month or year.
But when you log into your trading account and you’re down a bunch of money for the day or month, it’s hard not to believe that you’ve done something wrong.
Author Morgan Housel offers a great analogy to help you ride out the market dips and embrace volatility.
Housel suggests viewing volatility as a fee, not a fine.
If you get a fine, like a parking fine for parking in an illegal spot, you change your behavior and avoid that spot in the future.
But if that parking spot required a fee up front, you would pay it and continue parking there if that spot was the best spot for miles.
The same principle applies to investing.
If you own an index, like the S&P 500, view the volatility and the occasional dip as a fee for being in the market and getting the opportunity to receive high annual returns over an extended period of time.
3. Tail Investments
When amazon launched the Fire phone in 2014, it could very well have been a dominant smartphone and doubled amazon’s stock price, but the fire phone was a dud, and just a few years after the fire phone was launched CEO Jeff Bezos had to scrap the project and swallow a $170 million loss.
But Bezo’s was unfazed. In an interview after the Fire phone failure he said, “if you think that’s a big failure, we’re working on much bigger failures right now. I’m not kidding. Some of them are going to make the Fire phone look like a tiny little blip.”
Bezos made hundreds of small bets at Amazon.
One of those bets was Amazon Web Services—a small side project that now generates over 60% of Amazon’s operating income.
Amazon Web Services is a tail investment. A single investment that massively outperformed all other investments and made up for several bad investments, like the Fire phone.
Since it’s impossible to know which investments will generate huge returns and which will not, it’s wise to spread out your bets.
Instead of going all in on one investment, make at least 10 equal investments in a diversified group of companies, currencies, commodities, or other assets you think could double in the next five years.
Or invest in a big broad index of companies like the Russell 3000. Since 1980 nearly 50% of companies in the Russell 3000 have lost value, but the index has provided a 73-fold return thanks to just seven percent of companies in the index—like Apple and Amazon who have done extraordinarily well.
"You can be wrong half the time and still make a fortune."
In the end, strengthen your investing psychology by constantly reminding yourself to leverage the power of compounding, embrace volatility, and make many diversified investments to benefit from a few tail investments.
Remember Buffett’s compounding curve and invest right now to make time your biggest competitive advantage.
Remember that volatility is a fee and not a fine and remember that you can have several failed investments, like the fire phone, so long as you have one or two wildly successful investments like AWS.