How we think and feel about money dictates how invest, save, and spend. If your psychology is messed up, your finances will be messed up as well. Housel provides some simple but effective rules for everyone to take to heart. If you read this and 'I Will Teach You To Be Rich', you'll be ahead of 99% of the population.
Investing is the only industry where someone with no degree, training, and connections can massively outperform someone with the best education, training, connections.
Despite thousands of Ivy League graduates going into finance over the last two decade, there's no evidence thaqt this influx of talent has made us better investors.
Your personal experiences with money dictate how you think the world works.
The person who grew up in poverty thinks about risk and reward in ways the child of a wealthy banker cannot fathom. The person who grew up when inflation was high experienced something the person who grew up with stable prices never had to. The stock broker who lost everything during the Great Depression experienced something the tech worker basking in the glory of the late 1990s can’t imagine.
Americans spend more on Lottery Tickets than movies, video games, music, sporting events, and books combined. And who buys them?The lowest-income households in the U.S. on average spend $412 a year on lotto tickets, four times the amount of those in the highest income groups.
The concept of Retirement is two generations old. The 401(k) did not exist until 1978. The Roth IRA was not born until 1998. If it were a person it would be barely old enough to drink. No wonder many of us are bad at saving and investing for retirement. We’re not crazy. We’re all just newbies.
Someone else’s failure is usually attributed to bad decisions, but when judging yourself, you can make up a wild narrative justifying your past decisions and attributing bad outcomes to risk.
Countless fortunes (and failures) owe their outcome to leverage.The best (and worst) managers drive their employees as hard as they can.“The customer is always right” and “customers don’t know what they want” are both accepted business wisdom.The line between “inspiringly bold” and “foolishly reckless” can be a millimeter thick and only visible with hindsight.
The more extreme the outcome, the less likely you can apply its lessons to your own life, because the more likely the outcome was influenced by extreme ends of luck or risk.
Bill Gates once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.” The same is true in the other direction. Failure can be a lousy teacher, because it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk.
The hardest financial skill is getting the goalpost to stop moving. Happiness is Results minus Expectations.
An athlete making $500k per year compares is objectively well off, until he compares himself to a player making $36 million per year. The player making $36 million will compare himself to the hedge fund manager making $340 million per year and feel poor. But the hedge fund manager compares himself to the best-paid hedge fund manager alive, making $770 million per year. This hedge fund manager then compares himself to Warren Buffet, who made $3.5 billion in a year. And finally Buffet compares himself to Jeff Bezos, who made $24 billion in a year — more per hour than what the original athlete made in a year.
The ceiling of social comparison is so high that virtually no one will ever hit it. Which means it’s a battle that can never be won.
An ice age starts with moderately cool summers, not cold winters. When a summer never gets warm enough to melt the previous winter’s snow, the leftover ice makes it easier for snow to accumulate the following winter, which increases the odds of snow sticking around in the following summer. The snow reflects more of the sun’s rays, which cools the Earth even further, which brings more snowfall, and on and on. Within a few hundred years a seasonal snowpack grows into a continental ice sheet. It is not necessarily the amount of snow that causes ice sheets but the fact that snow, however little, lasts.
Warren Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child. Of Warren Buffett’s $84.5 billion net worth, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s.Buffett began serious investing when he was 10 years old. By the time he was 30 he had a net worth of $1 million. What if he was a more normal person, spending his teens and 20s exploring the world and finding his passion, and by age 30 his net worth was $25,000? What would a rough estimate of his net worth be today? Not $84.5 billion. $11.9 million. 99.9% less than his actual net worth. His skill is investing, but his secret is time. That’s how compounding works.
If I ask you to calculate 8+8+8+8+8+8+8+8+8 in your head, you can do it in a few seconds (it’s 72). If I ask you to calculate 8×8×8×8×8×8×8×8×8, your head will explode (it’s 134,217,728).
If you were a technology optimist in the 1950s you may have predicted that practical storage would become 1,000 times larger. Maybe 10,000 times larger, if you were swinging for the fences. Few would have said “30 million times larger within my lifetime.” But that’s what happened.
There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called Shut Up And Wait. It’s just one page with a long-term chart of economic growth.
Good investing is not about making good decisions. It's about consistently not screwing up.
There are a million ways to get wealthy, but only one way to stay wealthy: some combination of frugality and paranoia.
The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference.
Compounding only works if you can give an asset years and years to grow. It’s like planting oak trees: A year of growth will never show much progress, 10 years can make a meaningful difference, and 50 years can create something absolutely extraordinary.
More than I want big returns, I want to be financially unbreakable. 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.
Compounding doesn’t rely on earning big returns. Merely good returns sustained uninterrupted for the longest period of time will always win.
Great art dealers operate like Index Funds. They buy everything they can, not just individual pieces they happen to like. Then they sit and wait for a few winners to emerge. Perhaps 99% of the works art investors acquired turned out to be of little value. But that doesn’t particularly matter if the other 1% turn out to be the work of someone like Picasso.
Out of more than 21,000 Venture Capital financings from 2004 to 2014: 65% lost money. 2.5% made 10x–20x. 1% made more than a 20x return. 0.5%—about 100 companies out of 21,000—earned 50x or more. That’s where the majority of the industry’s returns come from.
All the returns of a stock index came from 7% of their companies that outperformed by at least two standard deviations. That’s the kind of thing you’d expect from venture capital. But it’s what happened inside a boring, diversified index.
Consider what would happen if you saved $1 every month from 1900 to 2019. You invest that $1 into the U.S. stock market every month, rain or shine. It doesn’t matter if economists are screaming about a looming recession or new bear market. You just keep investing. How much money would you end up with over time? $435,551.
How you behaved as an investor during a few months in late 2008 and early 2009 will likely have more impact on your lifetime returns than everything you did from 2000 to 2008.
A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.
The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”
Reactance: Doing something you love on a schedule you can’t control can feel the same as doing something you hate.
Gerontologist Karl Pillemer interviewed a thousand elderly Americans looking for the most important lessons they learned from decades of life experience. #[[Life Lessons]]
When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead, you think, “Wow, if I had that car people would think I’m cool.”
You might think you want an expensive car, a fancy watch, and a huge house. But you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it.
When most people say they want to be a millionaire, what they might actually mean is “I’d like to spend a million dollars.” And that is literally the opposite of being a millionaire.
Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see. Wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now.
Building wealth has little to do with your income or investment returns, and lots to do with your savings rate. Wealth is just the accumulated leftovers after you spend what you take in.
Personal savings and frugality are parts of the money equation that are in your control and have a 100% chance of being as effective in the future as they are today.
You can build wealth without a high income, but have no chance of building wealth without a high savings rate. It’s clear which one matters more.
Past a certain level of income, what you need is just what sits below your ego. Spending beyond a pretty low level of materialism is mostly a reflection of ego approaching income, a way to spend money to show people that you have (or had) money.
Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.
In the real world, people do not want the mathematically optimal strategy. They want the strategy that maximizes for how well they sleep at night. “Minimizing future regret” is hard to rationalize on paper but easy to justify in real life.
The most important thing to building wealth is commitment to a strategy in times of crisis. The historical odds of making money in U.S. markets are 50/50 over one-day periods, 68% in one-year periods, 88% in 10-year periods, and (so far) 100% in 20-year periods. Anything that keeps you in the game has a quantifiable advantage.
“Things that have never happened before happen all the time.”
The most important events in historical data are the big outliers, the record-breaking events. They are what move the needle in the economy and the stock market. 0.00000000004% of people were responsible for perhaps the majority of the world’s direction over the last century. Imagine the 20th century without: The Great Depression, Hitler, World War II, The Manhattan Project, vaccines, Antibiotics, Bill Gates, ARPANET, Stalin, and the fall of the Soviet Union.
9/11 prompted the Federal Reserve to cut interest 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 a college education, which led to $1.6 trillion in student loans with a 10.8% default rate. It’s not intuitive to link 19 hijackers to the current weight of student loans, but that’s what happens in a world driven by a few outlier tail events.
In Pharaonic Egypt … scribes tracked the high-water mark of the Nile and used it as an estimate for a future worst-case scenario. The same can be seen in the Fukushima nuclear reactor, which experienced a catastrophic failure in 2011 when a tsunami struck. It had been built to withstand the worst past historical earthquake, with the builders not imagining much worse—and not thinking that the worst past event had to be a surprise, as it had no precedent.
An interesting quirk of investing history is that the further back you look, the more likely you are to be examining a world that no longer applies to today. Many investors and economists take comfort in knowing their forecasts are backed up by decades, even centuries, of data. But since economies evolve, recent history is often the best guide to the future, because it’s more likely to include important conditions that are relevant to the future.
The further back in history you look, the more general your takeaways should be. General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tend to be stable in time. The history of money is useful for that kind of stuff.
The four most dangerous words in investing are, "it’s different this time."
“The purpose of the margin of safety is to render the forecast unnecessary.”
The pundit who speaks in unshakable certainties will gain a larger following than the one who says “We can’t know for sure,” and speaks in probabilities
When analyzing other people’s home renovation plans, most people estimate the project will run between 25% and 50% over budget. But when it comes to their own projects, people estimate that renovations will be completed on time and at budget.
the person with enough room for error in part of their strategy (cash) to let them endure hardship in another (stocks) has an edge over the person who gets wiped out, game over, insert more tokens, when they’re wrong.
Spreadsheets are good at telling you when the numbers do or don’t add up. They’re not good at modeling how you’ll feel when you tuck your kids in at night wondering if the investment decisions you’ve made were a mistake that will hurt their future. Having a gap between what you can technically endure versus what’s emotionally possible is an overlooked version of room for error.
You you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking. The odds are in your favor when playing Russian roulette. But the downside is not worth the potential upside.
Young people pay good money to get tattoos removed that teenagers paid good money to get. Middle-aged people rushed to divorce people who young adults rushed to marry. Older adults work hard to lose what middle-aged adults worked hard to gain. On and on and on.
All of us are walking around with an illusion—an illusion that history, our personal history, has just come to an end, that we have just recently become the people that we were always meant to be and will be for the rest of our lives. We tend to never learn this lesson. Research shows people from age 18 to 68 underestimate how much they will change in the future.
Part of the reason Warren Buffett became so successful is because he kept doing the same thing for decades on end, letting compounding run wild. But many of us evolve so much over a lifetime that we don’t want to keep doing the same thing for decades on end.
Avoid the extreme ends of financial planning. Assuming you’ll be happy with a very low income, or choosing to work endless hours in pursuit of a high one, increases the odds that you’ll one day find yourself at a point of regret.
Compounding works best when you can give a plan years or decades to grow. This is true for not only savings but careers and relationships. Endurance is key.
Aiming, at every point in your working life, to have moderate annual savings, moderate free time, no more than a moderate commute, and at least moderate time with your family, increases the odds of being able to stick with a plan and avoid regret than if any one of those things fall to the extreme sides of the spectrum.
Sunk costs are the equivalent of a stranger making major life decisions for you.
Successful investing looks easy when you’re not the one doing it. But do you know how hard it is to maintain a long-term outlook when stocks are collapsing?
The average equity fund investor underperformed the funds they invested in by half a percent per year—the result of buying and selling when they should have just bought and held.
How much should you pay for Google stock today? The answer depends on who “you” are.
Do you have a 30-year time horizon? Then the smart price to pay involves a sober analysis of Google’s discounted cash flows over the next 30 years.
Want to cash out within 10 years? Analyze the tech industry’s potential over the next decade and whether Google management can execute on its vision.
Want to sell within a year? Then pay attention to Google’s current product sales cycles and whether we’ll have a bear market.
Are you a day trader? Then the smart price to pay is “who cares?”
Financial Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long term to mostly short term. The formation of bubbles isn’t so much about people irrationally participating in long-term investing. They’re about people somewhat rationally moving toward short-term trading to capture momentum that had been feeding on itself.
Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.
It’s hard to justify paying $700,000 for a two-bedroom Florida track home to raise your family in for the next 10 years. But it makes perfect sense if you plan on flipping the home in a few months into a market with rising prices to make a quick profit.
Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.
Real optimists don’t believe that everything will be great. That’s complacency. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way. The simple idea that most people wake up in the morning trying to make things a little better and more productive than wake up looking to cause trouble is the foundation of optimism.
Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention.
Only 2.5% of Americans owned stocks on the eve of the great crash of 1929 that sparked the Great Depression. But the majority of Americans—if not the world—watched in amazement as the market collapsed, wondering what it signaled about their own fate. So closely had the others watched the market and regarded it as an index of their fates that they suddenly stopped much of their economic activity.
There are lots of overnight tragedies. There are rarely overnight miracles.
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.
The Washington Post wrote in 1909: “There will never be such a thing as commercial aerial freighters. Freight will continue to drag its slow weight across the patient earth.” The first cargo plane took off five months later.
We could have a Hurricane Katrina five times a week, every week—imagine how much attention that would receive—and it would not offset the number of annual lives saved by the decline in heart disease in the last 50 years.
In 2007, we told a story about the stability of housing prices, the prudence of bankers, and the ability of financial markets to accurately price risk. In 2009 we stopped believing that story. That’s the only thing that changed. But it made all the difference in the world.
Investing is one of the only fields that offers daily opportunities for extreme rewards. People believe in financial quackery in a way they never would for, say, weather quackery because the rewards for correctly predicting what the stock market will do next week are in a different universe than the rewards for predicting whether it will be sunny or rainy next week.
85% of active Mutual Funds underperformed their benchmark over the 10 years ending 2018. You would think an industry with such poor performance would be a niche service and have a hard time staying in business. But there’s almost five trillion dollars invested in these funds.
Think about market forecasts. We’re very, very bad at them. I once calculated that if you just assume that the market goes up every year by its historic average, your accuracy is better than if you follow the average annual forecasts of the top 20 market strategists from large Wall Street banks.
“Risk is what’s left over when you think you’ve thought of everything.”
Wealth is created by suppressing what you could buy today in order to have more stuff or more options in the future. No matter how much you earn, you will never build wealth unless you can put a lid on how much fun you can have with your money right now, today.
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 makes little things grow big and big mistakes fade away.
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.
Define the cost of success and be ready to pay it. Because nothing worthwhile is free. And remember that most financial costs don’t have visible price tags. Uncertainty, doubt, and regret are common costs in the finance world. They’re often worth paying. But you have to view them as fees (a price worth paying to get something nice in exchange) rather than fines (a penalty you should avoid).
Half of all U.S. Mutual Funds portfolio managers do not invest a cent of their own money in their funds
Good decisions aren’t always rational. At some point you have to choose between being happy or being “right.”
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 low-cost Index Funds will provide the highest odds of long-term success.
I can afford to not be the greatest investor in the world, but I can’t afford to be a bad one.
The average new American home now has more bathrooms than occupants. Nearly half have four or more bedrooms, up from 18% in 1983.