Book: 20210924 to 20211004, "The Psychology of Money" by Morgan Housel

20210924 - Introduction

Wealth management is quite different from other professional skills. It has three special features.

1. It's more about psychology than skill;

2. It's more about time than position; (compound effects)

3. There are a lot of traps from other people/companies.

20210925 - 1. No One's Crazy

It's impossible to predict the short term change of market, because everyone has different view about the market. Their view is based on their unique experience/memory.

Different age, race, residency, education, etc. give us different experience. Reading gives us better prediction of the long term change of market, but, while one step ahead is GOD, and two steps ahead leads to bankruptcy.

Boundary of safety is critical. We need to allow ourselves making mistakes.

20210926 - 2. Luck & Risk

All extreme archivements are heavily relied on luck. To tell the difference between luck and effort, we need to check their principles based on the first principle.

There is always something always hard and always correct. That's the part we need to follow.

For example, read a lot, think ahead think hard, stay hungry stay foolish, etc.

Wealth/success is not the one we should admire.

20210926 - 3. Never Enough

Life is about "the moment". We need some resource to survive, all others are extra and unnecessary.

Our gene want us to get more. The more resource, the more chance of survival and reproduction. But we don't have to obey our gene.

Try to get more resource is all right, but the cost should not be higher and higher risk.

20210927 - 4. Confounding Compounding

How to change our lives? Make sure you are at the right track (read, exercise, eat healthy, don't get bad habit, etc.), then just be patient. Time will do the rest.

20210927 - 5. Getting Wealthy vs. Staying Wealthy

In the past 170 years, 99.9% of the companies in USA went bankrupcy. p66 This is the risk of stock market. This is why passive Index Fund is much better than specific stocks.

To let compound effect work, we need to survive. It's worth of sacrificing some profit for safety. Wealthy people don't use leverage. They don't trade options or CFD. They are patient.

20210929 - 6. Tails, You Win

Investment Opportunity VS Investment Strategy

To most people, Investment Strategy is more important. Larger potential profit always come with bigger risks.

Why Warren Baffett refused to invest in Telsa? By probability theory, Elon Musk was not likely to succeed again after Zip2 and PayPal. But he made it.

Most of the time of investment is waiting/boring. Only tiny bit of time is critical. We don't know when the time comes, so we'd better ignore it, and stick to our investment strategy.

Most of the companies in SP500 don't do well, but that doesn't matter. A few of them will do so well, that contribute pretty good profit to SP500 index.

"How much money you make when you're right and how much you lose when you're wrong?" --- George Soros.

20210929 - 7. Freedom

"Controlling your time is the highest dividend money pays."

If there is no pressure with making money, we can choose the job that don't need us work many hours a week, then we get more time to think about our lives, and read more.

So, what is the best job? We like the work content, and it needs less hours, and get enough salary to pay for household and have extra for investment. Growth potential and unlimit cap, of course.

It's not worth working extra hours to get higher pay.

20210929 - 8. Man in the Car Paradox

People usually get respect from their capability and archivement. It's not their luxury house, car, cloth, etc., but their "title". Olympic champion, scientist, doctor, CEO, chess master, artist, writer, philanthropist, etc.

Materialized stuff are not part of us. It's just been kept by us. They don't really belong to anyone.

20210929 - 9. Wealth is What You Don't See

Wealth is capability. The choices and freedom we own.

It's hard for people to learn how to be wealth through imitation, because it's hidden. Maybe kids can learn it from their parents? 

Still hard. External environment has much greater impact than parenting. Most of children don't want to copy the charactics of their parents.

So, for anyone don't like read, it's hard for them to accumulate wealth. Maybe this is the reason that most of wealthy people like reading?

No. Based on "The millionaires next door", education don't let people learn to be frugal.

In the end, it's still friends and habit. I guess.

20210929 - 10. Save Money

"Having more control over your time and options is becoming one of the most valuable currencies in the world. That's why more people can, and more people should, save money."

Money for emergency gives us capabilities to bargin with fate.

Wealth gives us freedom, time and options.

20210930 - 11. Reasonable > Rational

Index Fund is perfect to tun "rational" into "reasonable". It brings best result to us and prevent most of the pain of market crash.

No analysis is perfect. Reasonable admits that, and take actions based on rationality and passion.

20211001 - 12. Surprise!

Something never happened before happens from time to time. Every year. History repeats itself, but change a bit everytime.

Short-term volatility is unpredictable. Big events, good or bad, happens all the time.

But market crash comes less and less often now, and that's with the help of MMT. Most of people don't like market crash. So, for democracy countries, it's almost everyone's wish to push the market going up.

There's no MMT even 10 years ago. (MMT started from 2012 in Japan)

Technology give people the power to push the market going up.

But people's gene is not going to change. Fear and greedness is always there.

20211001 - 13. Room for Error

Margin of safety is the financial buffer for investors. It means sacrifice some potential profit to reduce risk, so can stay in the game.

Stock price doesn't always go up. We need to prepare for the rainy day.

Is it worth to borrow based on shares? No. Especially if don't need money so desperately. It's not worth to pursue extra profit under such potential risk.

20211002 - 14. You'll Change

The end of history illusion means that everything will pass by. No matter good or bad, victory or failure, achivement or disaster, dream or fear.

Normally we should avoid extreme plan. Extreme plan is hard to last for long time. It loses balance. Instead, we should do minor changes from time to time, then wait patiently, let the compounding effect helping us.

Elon Musk is a good example. He stick with extreme plan changes, and the compounding effect also works on those extremem changes. The result is astounding. But most of people cannot do that.

Sunk cost = Ego. We refused to admit that we were wrong, and we have wasted a lot of money/time/effort. But making mistakes are quite common. The earlier we do the correction, the more benefit we will get.

20211002 - 15. Nothing's Free

I don't agree with Morgan Housel here. Volatility and risk of stock market are more like rule than fee. They are inevitable. The only way to avoid them is to stop invest in stock market.

The real fee is trading cost. The more we trade, then more we pay.

20211002 - 16. You & Me

Don't follow the market. The market is wrong most of time(to you). It could be correct to some investors, such as day traders, but not right to other investors.

The price could be too high or too low, but if we believe it can generate decent profit for long term, we don't need to worry about it. Sooner or later, the price will back to the real value.

Day traders don't care about the real value of a company. They just want to make quick money.

20211003 - 17. The Seduction of Pessimism

Success comes slowly. It means more up than down over long period of time. In stock market, most of the time the stock price is going down slightly, and only in a small percentage of time it goes up sharply. Our psychology makes us hard to see through this mist, especially the price would go down quickly every a few years.

On the other hand, failure comes abruptly. It's shocking and huge. "Thinking, fast and slow" says we measure the past by extreme cases and the ending. For stock investing, that means, most of the ending (the moment) give us bad news.

Our gene think survival is much more important than thriving. This means, the impact of bad news is much greater than good news.

If we cannot recognize this psychological pattern/characteristic, then we can only see the illusion.

20211003 - 18. When You'll Believe Anything

We are willing to believe what we want to believe. Sometimes the result is too bad if things don't go as planned, that we don't want to consider the probability of that.

For the parts we don't know, we build our own theory/story to explain it, or just ignore them.

This can explain the failures of USA in the past 70 years. It also explains why almost no one can beat Index Fund. Luck is always critical. If someone succeeded through some theory, that theory would be mimic by other investors, then it would lose the magic.

20211003 - 19. All Together Now

When math meet psychology, who would win?

Math. Of course.

But the base of psychology is also math (Probability theory, statistics, etc.).

This book is all about psychology. It's useful, but it doesn't help us to analyze specific stock or stock sector.

20211004 - 20. Confessions

Morgan Housel seems don't know much about any specific stock, or he has quite low tolerance with risk and volatility, and he is happy with frugal lifestyle.

I also lie frugal lifestyle. Luxury stuff are waste of money and meanlingness to me. But I believe MMT (zero interest), I believe EV, sustainable energy, Autonomous driving, AI and Robots.

Starting from 1980, there were at least three waves: personal computer, internet and smart phone. I missed all of them. But I will catch some of the other waves in the future.

20211004 - Postscript

Morgan Housel doesn't mention Reagan tax cuts, China or MMT. Weird.

I think Reagan tax cuts is the major reason that rich get much richer starting from 1980s; China is the major reason that poor/middle get much poorer; MMT is mainly for supporting Social security system.

Good to know more about the USA economical history between 1945 to know. When most of the families got car, it's hard for the economy to jump again. The same situation also happened in other countries including China.

What's the next potential force to drive up the economy? Robots?

International Index seems better than SP500 Index. Fair piece of cake should be based on more countries.

20241020 - Read it again

Should we sacrifice profit for mental comfortness? I don't agree.

Take loan to buy property make sense. We need margin to handle Black Swans. 

Or even better, "Safe Haven" to gain from Black Swans.

Be brave!