Chapter 1 - No one’s crazy
On experiences
Experiences are formative - it is hard to truly understand fear and uncertainty simply from reading or hearing about it no matter how open minded you are. Michael Batnick said “some lessons have to be experienced before they can be understood”
In 2006 economists Ulrike Malmendier and Stefan Nagel from the National Bureau of Economic Research dug through 50 years of the Survey of Consumer Finances and found that people’s lifetime investment decisions are heavily anchored to the experiences those investors had in their own generation especially experiences early in their adult life.
Bill Gross, the famed bond manager, admits that he would probably not be where he is today if he had been born a decade earlier or later. Gross’s career coincided almost perfectly with a generational collapse in interest rates that gave bond prices a tailwind.
On modern financial trends
Current financial meta of investing and saving is reletively new. Feeling entitled to retirement is at most 2 generations old.
Earlier on, most people worked until they died. Social Security tried to change this which led to the idea of retiring becoming popular in 1980.
The 401k did not exist until 1978. The Roth IRA was not born until 1998. College was not a societial want until the 2000s. And Index funds are less than 50 years old while Hedge funds were popularized only in the last 25 years. Credit and debt only became widespread and normalized after World War II, when the GI Bill made it easier for Americans to borrow.
Chapter 2 - Luck and Risk
Luck plays an integral part to the trajectory of anyone’s life. Economist Bhashkar Mazumder has shown that incomes among brothers are more correlated than height or weight. This is an example of luck (birth situation) making it more likely for siblings to go through the same education route, process etc.
Outsiders’ perception of risk assumed is always different than one’s self reflection. Someone else’s failure is usually attributed to bad decisions, while your own failures are usually chalked up to the dark side of risk.
Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
It is naive and ignorant to assume 100% of outcomes can be attributed to effort and decisions. Risk/Luck plays a huge part
Focus less on specific individuals and case studies and more on broad patterns.
What worked for a single person will almost not generalize to everyone, and it is often a case of Survivorship bias. It is ‘safer’ to follow larger trends
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. Ultimately, risk is a probabilistic chance that can play out either way (unless you have 100% odds).
Chapter 3 - Never enough
Convicted entrepreneurs like Rajat Gupta and Bernie Madoff initially had extremely successful businesses. Hedge funds like Long-Term Capital Management took on so much risk that they lost everything in the greatest bull market. The idea of never having enough is inexplicitly linked to greed, which often leads to people doing extreme things that lead to their downfall
- The hardest financial skill is getting the goalpost to stop moving
- Social comparison is the problem here. Capitalism generates wealth and envy
- “Enough” is not too little. Enough is knowing your limits
- There are many things never worth risking, no matter the potential gain
Chapter 4 - Confounding Compounding
Ice ages were caused by moderately cool summers, not cold winters. Ice that built up over the winters did not melt fast enough, accumulating.
Warren Buffet current networth (at point of book writing) was 84.5 billion. Of that, 81.5 billion came after he qualified for Social Security, in his mid-60s.
Linear thinking is more intuitive to humans than exponential thinking, it is harder to grasp the full effects of compounding
Chapter 5 - Getting Wealthy vs Staying Wealthy
There are many ways to get wealthy, but only one way to stay wealthy: some combination of frugality and paranoia.
Jesse Livermore, a professional trader, was heavily short before the Great Depression. After, overflowing with confidence, he made larger and larger bets until he blew up.
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
Nassim Taleb: “Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.
The survival mindset
- Be financially unbreakable. Stick around long enough for compounding to work wonders.
- Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
- A barbelled personality - optimistic about the future, but paranoid about what will prevent you from getting to the future- is vital