The Big Idea
Morgan Housel writes 19 short stories that explore how people think and act about money
“Things that have never happened before happen all the time.”
8.5/10 – Not a how-to book, but beautiful writing and great stories throughout.
“A genius is the man who can do the average thing when everyone else around him is losing his mind.” —Napoleon
I love Voltaire’s observation that “History never repeats itself; man always does.” It applies so well to how we behave with money.
Take a simple example: lottery tickets. Americans spend more on them than movies, video games, music, sporting events, and books combined. And who buys them? Mostly poor people. 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. Forty percent of Americans cannot come up with $400 in an emergency. Which is to say: Those buying $400 in lottery tickets are by and large the same people who say they couldn’t come up with $400 in an emergency. They are blowing their safety nets on something with a one-in-millions chance of hitting it big.
There is a widespread belief along the lines of, “everyone used to have a private pension.” But this is wildly exaggerated. The Employee Benefit Research Institute explains: “Only a quarter of those age 65 or older had pension income in 1975.” Among that lucky minority, only 15% of household income came from a pension.
Same goes for college. The share of Americans over age 25 with a bachelor’s degree has gone from less than 1 in 20 in 1940 to 1 in 4 by 2015.
The average college tuition over that time rose more than fourfold adjusted for inflation.8 Something so big and so important hitting society so fast explains why, for example, so many people have made poor decisions with student loans over the last 20 years.
When judging others, attributing success to luck makes you look jealous and mean, even if we know it exists. And when judging yourself, attributing success to luck can be too demoralizing to accept.
Economist Bhashkar Mazumder has shown that incomes among brothers are more correlated than height or weight. If you are rich and tall, your brother is more likely to also be rich than he is tall.
After spending years around investors and business leaders I’ve come to realize that 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.
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.
Modern capitalism is a pro at two things: generating wealth and generating envy.
Social comparison is the problem here.
“Enough” is not too little.
There are many things never worth risking, no matter the potential gain.
But there’s only one way to stay wealthy: some combination of frugality and paranoia.
More than I want big returns, I want to be financially unbreakable. And 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.
A barbelled personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.
The most impressive people are packed full of horrendous ideas that are often acted upon.
Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of wellbeing than any of the objective conditions of life we have considered.
Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time.
Median family income adjusted for inflation was $29,000 in 1955.28 In 2019 it was just over $62,000.
Rockefeller’s job wasn’t to drill wells, load trains, or move barrels. It was to think and make good decisions. Rockefeller’s product—his deliverable—wasn’t what he did with his hands, or even his words. It was what he figured out inside his head. So that’s where he spent most of his time and energy. Despite sitting quietly most of the day in what might have looked like free time or leisure hours to most people, he was constantly working in his mind, thinking problems through.
It’s a subtle recognition that people generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine. If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever will.
The United States uses 60% less energy per dollar of GDP today than it did in 1950.
There are professional investors who grind 80 hours a week to add a tenth of a percentage point to their returns when there are two or three full percentage points of lifestyle bloat in their finances that can be exploited with less effort.
But 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. Think of it like this, and one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.
“Things that have never happened before happen all the time.”
The thing that makes tail events easy to underappreciate is how easy it is to underestimate how things compound.
Whenever we are surprised by something, even if we admit that we made a mistake, we say, ‘Oh I’ll never make that mistake again.’ But, in fact, what you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising.
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.
But there’s an important nuance: The further back in history you look, the more general your takeaways should
“the purpose of the margin of safety is to render the forecast unnecessary.” It’s hard to overstate how much power lies in that simple statement.
Room for error lets you endure a range of potential outcomes, and endurance lets you stick around long enough to let the odds of benefiting from a low-probability outcome fall in your favor. The biggest gains occur infrequently, either because they don’t happen often or because they take time to compound.
A good rule of thumb for a lot of things in life is that everything that can break will eventually break.
An underpinning of psychology is that people are poor forecasters of their future selves.
“When I asked Danny how he could start again as if we had never written an earlier draft,” Zweig continued, “he said the words I’ve never forgotten: ‘I have no sunk costs.’”
Responding to critics who said his actions were wrong and what he should have done was obvious, Immelt told his successor, “Every job looks easy when you’re not the one doing it.”
Part of why bubbles are hard to learn from is that they are not like cancer, where a biopsy gives us a clear warning and diagnosis. They are closer to the rise and fall of a political party, where the outcome is known in hindsight but the cause and blame are never agreed upon.
Many finance and investment decisions are rooted in watching what other people do and either copying them or betting against them.
“For reasons I have never understood, people like to hear that the world is going to hell.”
Another is that pessimists often extrapolate present trends without accounting for how markets adapt.
A third is that progress happens too slowly to notice, but setbacks happen too quickly to ignore.
Through his computer, Hawking told the interviewer how excited he was to sell books to lay people. “Are you always this cheerful?” the Times asked. “My expectations were reduced to zero when I was 21. Everything since then has been a bonus,” he replied.
The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.
Investing is one of the only fields that offers daily opportunities for extreme rewards.
Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong.
Respect the power of luck and risk and you’ll have a better chance of focusing on things you can actually control.
If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.
Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune,
I’m saving for a world where curveballs are more common than we expect.
Effectively all of our net worth is a house, a checking account, and some Vanguard index funds