Financial success has little to do with how smart you are and a lot to do with your behavior. Have you ever wondered how it is that a person with many academic achievements ends up having less wealth than other people who do not even have studies?
13 Lessons about money
Human behavior is a determining variable in financial performance, from something as large as a country’s economy to the smallest, such as your personal finances, but at the same time, this is the most difficult aspect to analyze and understand in this post.
I’m going to summarize the most important chapters of a book called the psychology of money written by Morgan Household.
Chapter 1: No one is crazy
The idea we have about how the world and money work is little to do with what actually happens in the world and a lot to do with what you believe about it and what you think about the way the world works is highly influenced by your personal experience and your personal experiences depend on your immediate context.
For example, it is very likely that a person who lives in a country with an inflationary crisis has had negative experiences with saving and therefore, has the need to spend everything they earn in the shortest possible time. However, someone else who lives in a country with a stable currency thinks differently about saving and has a more optimistic outlook on it.
This is how two equally intelligent people can differ about how to save and invest money to multiply wealth. An average professional in australia before the pandemic crisis could not really understand people from other latitudes who have experienced many economic crises in their lives.
You can know the numbers and analyze the data and statistics, but you will never have the personal experience. Every decision people make with their money is justified by the information they have at the time and connected to their unique mental model of how the world works.
It seems we all do crazy things with our money, but no one is crazy. Our monetary decisions are based on unique experiences that can only make sense to us at any given time
Chapter 2: Luck and risk
If you interview successful business people to ask them about their success, they will surely talk about hard work and a lot of sacrifice that is the way they would explain their success, and although this is true for them, the other side of the coin is that there are incalculable and invisible variables that can be decisive, luck and risk. The results you will get in your life will be governed by forces that are beyond your individual effort.
Don’t get me wrong, this doesn’t mean you don’t have to try. This means that effort is not the only ingredient for success. For example, many people talk about bill gates, business, success and innovation. There are even those who would use it as an example to follow, but bill gates studied lakeside, an elite private school. In seattle. This was the only school with a computer in the 1960s.
The teletype model 33 this greatly influenced bill gates interests in computing. He even got permission from math classes, so he could pursue his interest in computer science. Bill gates himself admitted that if he hadn’t been able to study at a computer school like lakeside, there would have been no microsoft gates.
Wasn’t the only brilliant student at the school with him were paul allen and kent evans they were friends, anyone would have thought that all three were destined for success, but kent evans died prematurely in an accident before graduating.
As you can see, there were determining events in their fate which were not under their control. We see the results, but we don’t see the complexity behind it. That is also the case with risk. We are not able to measure the risks that large investors assumed.
We do not know how much risk that investor assumed with that company that is successful today. We do not know the debts that the successful businessman acquired betting on the future at the beginning of his business. This is not a simple problem.
Difficulty identifying what is due to luck, what is due to skill, and what is risk is one of the biggest problems we face when trying to learn about the best way to decide on our money. The author gives three lessons that we can learn from this reality.
One, not all success is due to hard work, and not all failure is due to laziness. Keep this in mind when you’re, judging others, and when judging yourself number two do not look at exceptional cases or take extreme examples, the more exceptional the result, the less applicable it is because it is very likely that extreme results have been influenced by extreme cases of luck or risk number three.
Nothing is as good or as bad as it seems, assuming the role that luck and risk play in the result we obtain will help us to forgive ourselves and leave room to keep trying until the game is in our favor.
Chapter 3: Never enough
When rich people do crazy things, many people want to become rich, but this is very abstract. How rich do you want to become? How much is enough?
There was a shelter island party thrown by a billionaire that was attended by two writers, kurt vonnegut and joseph heller vonnegut comments that a billionaire makes more money in a single day than all heller made from his novel. But heller responds yes, but I have something that he will never have enough.
There is a danger of never having enough people can have it all wealth, high value property power, but they can also take a chance and throw it all away because they wanted more. The author tells the story of rajet gupta, who was orphaned during his teens, but years later would go on to obtain an mba from harvard and become the ceo of mckenzie and company for 2008.
The value of his estate was reported to be a hundred million dollars, but gupta wanted more and he proved it in 2008. During the goldman sachs crisis, warren buffett decided to invest five billion dollars in the bank to help it survive.
Since gupta was a member of the goldman sachs board of directors, he got this information before the public dead, so he decided to secretly agree to buy goldman sachs shares before they rose because of buffett’s investment. Gupta was arrested for insider trading.
This is how he ruined his reputation and his career, motivated by the greed of never having enough in this chapter, the author leaves some important lessons. One, the most difficult financial skill is to make the goal stop drifting away.
The goal is set further and further when the taste for more wealth and power increases faster than satisfaction and this is a red flag that alerts that you are probably about to take more and more risks. Irrationally true happiness is in the satisfaction of having enough not in constant expectation number two social comparison is the problem.
Comparing yourself to others is unnecessary torture that you really should avoid. There will always be someone getting better results than you do. There will always be someone higher up the latter.
Comparing yourself to them will steal your joy run your own race number three. There are many things that are not worth risking, regardless of the potential gain. Reputation is priceless, freedom and independence are priceless, family and friends, are priceless being loved by those you love is priceless. Happiness is priceless. If you want to keep all of this with you, you need to know when to stop taking risks that can harm all of these valuable things.
Chapter 4: Confounding
Compounding there are many books about investing. Many of them are very good like those that talk about how warren buffett made his fortune through his investments.
Today, buffett’s fortune reaches 86.5 billion dollars, without a doubt, a phenomenal investor, but there’s something that you should not lose sight of buffett is not only a good investor, he has been a good investor, since he was just a boy. This is how more than 90 percent of his assets were accumulated after he was 50 years of age.
This is how more than 90 of his assets were accumulated after his 50 years of age, warren buffett’s skill is investing, but his secret is time, this is how compounding works.
The lesson that the author wants to teach in this chapter is that good, investing isn’t necessarily about earning the highest returns. The highest returns tend to be one-off. Hits that can’t be repeated good. Investing is about earning pretty good returns that you can stick with and which can be repeated for a long period of time and as charlie munger said, the first rule of compounding is never to interrupt it unnecessarily.
Chapter 5: Getting rich versus staying rich
many financial gurus talk about how to become rich, which has made it a boring topic for many people. But there is another thing that is often lost in the site, but there is another thing that is often lost from the site it is not just about accumulating a certain amount of capital, but about maintaining your wealth in time.
The author argues that there is only one way to stay. Rich, a combination of frugality and paranoia frugality means using your resources wisely. Getting rich requires you to take risks.
Being optimistic about the future and make yourself known, staying rich requires you to have humility and the fear that what you have earned will be taken away or lost. Compound interest is like planting a tree in one year. You won’t see much progress in 10 years.
You will notice the difference and in 50 you will have created something extraordinary, but staying on your feet, all the time requires you to survive the unpredictable ups and downs of life that we all experience over time.
Chapter 6: You could be wrong half the time and still make a fortune
In this chapter. The author tells the story of hinesburg gruen, who came to be admired for his acumen in investing in art, berggruen managed to amass a collection of valuable works of art, but the reality is that it was not pure insight, but bergruin bought large quantities of art and of all only a small part became valuable art. This means that bergruin was wrong most of the time.
However, he managed to get it right. If you want to venture into the world of entrepreneurship and investment, you must understand that many things in the world comply with the pareto principle or the 80-20 rule. Seasoned investors in large companies expect that of 100 of their investment decisions. 80 will fail.
If you see something that achieved extraordinary results or that becomes famous and influential, you must understand, that is an event in thousands or millions. This is the stock market. Most will fail, some will perform well and only some will generate incredible returns.
According to the author, warren buffett admitted that he has owned shares in more than 400 different companies in his lifetime, but the most significant gains came from only 10 of them. Many large companies understand this reality of life.
For example, if you review all the series that netflix has produced, you will see that only few of them have had significant success. When you realize this, you can accept that it is normal for many things to fail or go wrong.
Chapter 7: Freedom
In this chapter, the author tells how one day he wanted to become an investment banker because they were making a lot of money and he thought he would be happy once he worked on it when he managed to work as an investment banker he realized from day one why they were making a lot of money.
They worked harder and for more controlled hours than any human being could bear. The author says that, although in that job he felt important and he was well paid. There came a time when he no longer tolerated having become a slave to his boss, forced to work every second of the day. This made it the most miserable days of his life.
He was unable to work like this for over a month working on something you love to do during hours. You can’t control can turn into something you hate, no matter how much you love your activity. If it turns into something that takes control of your time, you will end up hating it.
The highest form of wealth is the ability to wake up every morning and say I can do whatever I want today. We hear all the time people saying they want to be happy, but happiness is complex because we are all different, but there is a common denominator. The universal fuel of joy is the ability to control their own lives.
There are attempting money making opportunities, but many are traps from which it can be difficult to escape. Don’t fall into the endless cycle of earning more by losing one of your most precious values, freedom, the ability to do what you want when you want with whoever you want for as long as you want is priceless
Chapter 9: Wealth is what you don’t see
Someone may appear rich, but it is impossible to know for sure. At first glance you could be seeing only the tip of the iceberg, don’t be tempted by those who flaunt their wealth.
It seems stupid to say so, but the only way to accumulate wealth is not to spend it oftentimes. When people say they want to be a millionaire. What they really mean is that they want to spend a million dollars, but spending a million dollars is literally the opposite of being a millionaire the wealth is hidden, wealth is income that is saved, not spent. Wealth is optionality, flexibility and growth.
Wealth is the ability to buy things if necessary, spending money to show others. How much money you have is the fastest way to have less money.
Chapter 13: Room for error
If you are not able to imagine the possibility of your failure, you will fail because the true failure will come when you do not know how to face a setback in your entrepreneurship and investments.
How do you face adversity if you’ve never considered the possibility or prepared for it? Putting all your eggs in one investment basket means you take too much risk by betting on just one option. If you do not expand your investment portfolio, it means that you are not leaving room for error. That is, you will not be prepared for any adverse outcome, and that is the true failure.
If something can break, it will break. So if you put a lot of things to depend on the performance of just one, you are counting the days of catastrophe, one of the biggest mistakes with money is relying solely on salary to fund short-term spending needs with no savings to protect you from unexpected expenses?
In the future, we like to think that we are saving for something certain like buying a car or for retirement, but the reality is that we do not know what will happen tomorrow and we cannot be sure where we will spend our savings.
This doesn’t mean that you shouldn’t plan. It means that you should leave room for error while planning
Chapter 14: Changing long term planning is not as easy as it may seem
You will change planning for the long term seems easier than it actually is because everything changes over time. You and I will change in 10 years, the world will also change.
This should not be an impediment to making plans for the future, but a warning that helps you to do so with the necessary prudence and wisdom to avoid future regrets. The author tells the story of a friend who, during his adolescence, always said that he dreamed of being a doctor for those days. It was easy to conclude that he couldn’t make it, but he did it with a lot of effort.
A few years ago, the author met again with that friend, who is now a doctor, but it turns out that now that friend, who fought for his dream of being a doctor, was sorry for choosing that career saying it was horrible in psychology. There is something called the illusion of the end of history.
This is what psychologists call the tendency for people to be acutely aware of how much they have changed in the past, but to underestimate how much their personalities, desires and goals are likely to change in the future. The reality is that you’ll change.
You will never stop doing it the same with your context. It will change and decisions that seemed correct in the past may end up looking crazy in the future. Think about this when it comes time to plan your finances for the long term,
Chapter 15: Nothing is free
Everything has a price, but not all prices appear on labels. The key in making financial decisions is figuring out what that price is and, if you’re willing to pay it.
What is the price of success? Are you willing to pay it before making the decision consider that most things are easier in theory than in practice to be successful as an investor, you will have to pay a price, but you will not pay the price with money.
You will pay it with uncertainty, doubt and fear related to market volatility. Your investment earnings are not free and never will be. Volatility and uncertainty are the cost of admission and fees to pay in that world.
The secret is to accept it and accept it as part of the deal and convince you that the price is worth it. Do you want to start something find out what the price is and pay it.
Chapter 16: You and I
you and I have different agendas and our agendas are designed from our vision of the world driven by our own incentives. Take this as a warning when, following the advice of footsteps of others in history, many financial bubbles have occurred, causing immeasurable damage to the wealth of many investors and ruining entire families.
A common denominator in all financial bubbles. Are those investors innocently, following the signals of other investors who are playing a different game than their own and inevitably falling into a trap?
Long-term investors and short-term investors have different agendas be careful with this when making investment decisions based on someone else’s steps?
Given this, the author recommends doing everything possible to identify what game you’re playing each investor must choose a strategy that has the best chance of successfully meeting their objectives.
Chapter 17: The seduction of pessimism
Have you noticed that many people seem to show a lot of interest in the tragic messages of the prophets of disaster? It’s as if people like to hear that the world is going to hell. Pessimism is the order of the day. This is because pessimism sounds smarter.
The author mentions the time that the wall street journal published an article written by russian professor named igor paneran. The article looked like the synopsis of a dystopian movie, literally warning that by 2010 the united states of america would be divided.
Alaska would come under Russian control, california would become the Californian republic and would be under Chinese influence and other apocalyptic prophecies, and so on.
This article was incredibly published on the front page of such a prestigious newspaper. Pessimism is natural and evolutionary since those organisms that treat threats is something urgent are more likely to survive and reproduce, however, optimism is the best bet for most people, because the world has always tended to get better for most people most of the time.
The reality is that the desire to survive in the pursuit of profit drive people to seek solutions amid adversity. In a context of necessity, innovation will appear because necessity is the mother of all innovation. Imagine that you’re in japan a few days after being destroyed by defeat in world war ii, and you read an article that says that japan will become one of the world’s leading economies.
What would you think, maybe you would believe it or maybe you’d see it as an optimistic cliche, but it came true. Japan managed to recover and became a world power after having hit rock bottom. As you can see, sooner or later, solutions will appear as a people’s response to problems and adversities.
This is one of the important drivers of economic recovery and one that is often ignored by pessimists without optimism, It’s possible for people to create solutions to problems. This is it for this post. If you want to see more summaries of financial books then check out the playlist you see on the screen right now, thanks for watching