My dad told me it would make him happy if I read Morgan Housel's book, The Psychology of Money, and I love my dad, so I did. Here are the key takeaways I think the book spotlighted, specifically ones that students might find useful.
I found a lot of it to be common sense, but here are the more interesting, nuanced, or significant opinions and facts Housel included.
Chapter 1: No One's Crazy
- If you were born in 1970, the S+P 500 increased almost 10-fold in your teens and 20s, versus folks born 20 years earlier had little to no growth-- luck of the timing!
- Americans spend more on lottery tickets than movies and books combined-- and it's mostly poor people that buy them
- Lowest-income households averaged 412 dollars per year on the lottery
- At the same time, 40% Americans claim to not have 400 dollars for an emergency
- In 1940, only 1 of every 20 Americans had a Bachelor's degree, but now it is 11 in every 4
- "Here we are, with between 20 and 50 years of experience in the modern financial system, hoping to be perfectly acclimated....there is not decades of accumulated experience to even attempt to learn from. We're winging it."
Chapter 2: Luck & Risk
- "be careful when assuming that 100% of outcomes can be attributed to effort and decisions"
- Never look at extreme examples as a path to success (such as Gates or Zuckerberg)
- Bill Gates said "Success is a lousy teacher. It seduces smart people into thinking they can't lose."
Chapter 3: Never Enough
- At a fancy party on Shelter Island, Joseph Heller, author of Catch-22, was told by Kurt Vonnegut that the party's host made more money in just one day than Heller had gotten from the book since publication, to which Heller said "Yes, but I have something he will never have...enough."
- Bernie Madoff, before being a conman, was a very successful market maker (a legit job that was not illegal) -- so why did he need to turn to fraud for more? If he already was super wealthy?
- "The hardest financial skill is getting the goalpost to stop moving."
- "Modern capitalism is a pro at two things: generating wealth and generating envy."
Chapter 4: Confounding Compounding
- 81.5 billion of Warren Buffet's 84.5 billion came after he turned 65-- he set himself up for success in many ways, one of which was being a good investor from a really young age (10!)
- "His skill is investing, but his secret is time."
- Hard to wrap your mind around because our brain handles linear thinking (8+8+8) much easier than exponential (8x8x8) -- compound interest operates as the latter
- "Good investing isn't necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can't be repeated. It's about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That's when compounding runs wild."
Chapter 5: Getting Wealthy vs Staying Wealthy
- "Only one way to stay wealthy: some combination of frugality and paranoia"
- Great Depression era
- Wall Street men were committing suicide en masse after the stock market crashed
- Jesse Livermore, a very successful stock market trader, happened to bet in October 1929 that the stocks would decline, making him even richer
- Livermore got cocky and made huge bets, ending up in huge debt, and then committing suicide himself
- 40% of companies that have made it to public trading have lost all or almost all their value
- Getting wealthy can require risk, staying wealthy generally means not taking any
- "barbelled personality"
- Sensible optimism
- From 1850 to 2020:
- Stocks lost a third of their value 12+ times
- Annual inflation exceeded 7% in 20+ years
- 99.9% of all companies formed went out of business
Chapter 6: Tails, You Win
- "You can be wrong half the time and still make a fortune."
- Long tails: "the farthest ends of a distribution of outcomes" (aka the ends of a bell curve)
- huge amounts of influence!
- Walt Disney
- The first few hundred cartoons cost a ton of money to produce; Disney Studios was effectively bankrupt
- Snow White earned $8 million in its first 6 months (in 1938!) and transformed Disney Studios, pulling them out of debt and filling them with assets
- Tail event, an outlier in other words
- Venture capital-- For every 50 investments a VS makes, somewhere around half are expected to fail, a handful to do pretty well, and 1-2 to explode with returns
- Russell 3000 Index: a big collection of established corporations/public companies that has been around since 1980
- 40% lost at least 70% of their value and had not recovered, HOWEVER, the index still returned for those who had it, courtesy of 7% of the companies who were just outperforming everyone else
- Napolean defined a military genius as someone "who can do the average thing when all those around him are going crazy"
- "If you're a good stock picker you'll be right maybe half the time....If you're a good investor most years will be just okay, and plenty will be bad."
Chapter 7: Freedom
