financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know. (Location 93)
To grasp why people bury themselves in debt you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism. To get why investors sell out at the bottom of a bear market you don’t need to study the math of expected future returns; you need to think about the agony of looking at your family and wondering if your investments are imperiling their future. (Location 127)
Note: Not for notes
Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works. (Location 140)
You know stuff about money that I don’t, and vice versa. You go through life with different beliefs, goals, and forecasts, than I do. That’s not because one of us is smarter than the other, or has better information. It’s because we’ve had different lives shaped by different and equally persuasive experiences. Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works. So equally smart people can disagree about how and why recessions happen, how you should invest your money, what you should prioritize, how much risk you should take, and so on. (Location 155)
I can read about what it was like to lose everything during the Great Depression. But I don’t have the emotional scars of those who actually experienced it. And the person who lived through it can’t fathom why someone like me could come across as complacent about things like owning stocks. We see the world through a different lens. (Location 170)
Spreadsheets can model the historic frequency of big stock market declines. But they can’t model the feeling of coming home, looking at your kids, and wondering if you’ve made a mistake that will impact their lives. (Location 173)
As investor Michael Batnick says, “some lessons have to be experienced before they can be understood.” (Location 177)
The economists wrote: “Our findings suggest that individual investors’ willingness to bear risk depends on personal history.” Not intelligence, or education, or sophistication. Just the dumb luck of when and where you were born. (Location 187)
Local stock markets in Germany and Japan were wiped out during World War II. Entire regions were bombed out. At the end of the war German farms only produced enough food to provide the country’s citizens with 1,000 calories a day. Compare that to the U.S., where the stock market more than doubled from 1941 through the end of 1945, and the economy was the strongest it had been in almost two decades. No one should expect members of these groups to go through the rest of their lives thinking the same thing about inflation. Or the stock market. (Location 207)
No one should expect them to respond to financial information the same way. No one should assume they are influenced by the same incentives. No one should expect them to trust the same sources of advice. No one should expect them to agree on what matters, what’s worth it, what’s likely to happen next, and what the best path forward is. Their view of money was formed in different worlds. And when that’s the case, a view about money that one group of people thinks is outrageous can make perfect sense to another. (Location 212)
Few people make financial decisions purely with a spreadsheet. They make them at the dinner table, or in a company meeting. Places where personal history, your own unique view of the world, ego, pride, marketing, and odd incentives are scrambled together into a narrative that works for you. (Location 251)
King Alyattes of Lydia, now part of Turkey, is thought to have created the first official currency in 600 BC. (Location 255)
Before World War II most Americans worked until they died. That was the expectation and the reality. The labor force participation rate of men age 65 and over was above 50% until the 1940s: (Location 260)
Social Security aimed to change this. But its initial benefits were nothing close to a proper pension. When Ida May Fuller cashed the first Social Security check in 1940, it was for 22.54,or416 adjusted for inflation. It was not until the 1980s that the average Social Security check for retirees exceeded $1,000 a month adjusted for inflation. More than a quarter of Americans over age 65 were classified by the Census Bureau as living in poverty until the late 1960s. 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. (Location 263)
Note: Facts
It was not until the 1980s that the idea that everyone deserves, and should have, a dignified retirement took hold. And the way to get that dignified retirement ever since has been an expectation that everyone will save and invest their own money. Let me reiterate how new this idea is: The 401(k)—the backbone savings vehicle of American retirement—did not exist until 1978. The Roth IRA was not born until 1998. If it were a person it would be barely old enough to drink. (Location 271)
Even widespread use of consumer debt—mortgages, credit cards, and car loans—did not take off until after World War II, when the GI Bill made it easier for millions of Americans to borrow. (Location 282)
Bill Gates went to one of the only high schools in the world that had a computer. The story of how Lakeside School, just outside Seattle, even got a computer is remarkable. Bill Dougall was a World War II navy pilot turned high school math and science teacher. “He believed that book study wasn’t enough without real-world experience. He also realized that we’d need to know something about computers when we got to college,” recalled late Microsoft co-founder Paul Allen. In 1968 Dougall petitioned the Lakeside School Mothers’ Club to use the proceeds from its annual rummage sale—about $3,000—to lease a Teletype Model 30 computer hooked up to the General Electric mainframe terminal for computer time-sharing. “The whole idea of time-sharing only got invented in 1965,” Gates later said. “Someone was pretty forwardlooking.” Most university graduate schools did not have a computer anywhere near as advanced as Bill Gates had access to in eighth grade. And he couldn’t get enough of it. Gates was 13 years old in 1968 when he met classmate Paul Allen. Allen was also obsessed with the school’s computer, and the two hit it off. Lakeside’s computer wasn’t part of its general curriculum. It was an independent study program. Bill and Paul could toy away with the thing at their leisure, letting their creativity run wild—after school, late into the night, on weekends. They quickly became computing experts. (Location 296)
Note: Facts
Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes. They are driven by the same thing: You are one person in a game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take. (Location 339)
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. (Location 355)
Cornelius Vanderbilt had just finished a series of business deals to expand his railroad empire. One of his business advisors leaned in to tell Vanderbilt that every transaction he agreed to broke the law. “My God, John,” said Vanderbilt, “You don’t suppose you can run a railroad in accordance with the statutes of the State of New York, do you?”10 My first thought when reading this was: “That attitude is why he was so successful.” Laws didn’t accommodate railroads during Vanderbilt’s day. So he said “to hell with it” and went ahead anyway. Vanderbilt was wildly successful. So it’s tempting to view his law-flaunting—which was notorious and vital to his success—as sage wisdom. That scrappy visionary let nothing get in his way! But how dangerous is that analysis? No sane person would recommend flagrant crime as an entrepreneurial trait. You can easily imagine Vanderbilt’s story turning out much different—an outlaw whose young company collapsed under court order. (Location 384)
Note: Facts
Benjamin Graham is known as one of the greatest investors of all time, the father of value investing and the early mentor of Warren Buffett. But the majority of Benjamin Graham’s investing success was due to owning an enormous chunk of GEICO stock which, by his own admission, broke nearly every diversification rule that Graham himself laid out in his famous texts. Where does the thin line between bold and reckless fall here? I don’t know. Graham wrote about his GEICO bonanza: “One lucky break, or one supremely shrewd decision—can we tell them apart?” Not easily. (Location 404)
Note: Facts
just be careful when assuming that 100% of outcomes can be attributed to effort and decisions. (Location 420)
Studying a specific person can be dangerous because we tend to study extreme examples—the billionaires, the CEOs, or the massive failures that dominate the news—and extreme examples are often the least applicable to other situations, given their complexity. The more extreme the outcome, the less likely you can apply its lessons to your own life, because the more likely the outcome was influenced by extreme ends of luck or risk. You’ll get closer to actionable takeaways by looking for broad patterns of success and failure. The more common the pattern, the more applicable it might be to your life. Trying to emulate Warren Buffett’s investment success is hard, because his results are so extreme that the role of luck in his lifetime performance is very likely high, and luck isn’t something you can reliably emulate. But realizing, as we’ll see in chapter 7, that people who have control over their time tend to be happier in life is a broad and common enough observation that you can do something with it. (Location 426)
The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed financial goal there won’t wipe you out so you can keep playing until the odds fall in your favor. But more important is that as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves and leave room for understanding when judging failures. (Location 442)
In the early 1900s a Serbian scientist named Milutin Milanković studied the Earth’s position relative to other planets and came up with the theory of ice ages that we now know is accurate: The gravitational pull of the sun and moon gently affect the Earth’s motion and tilt toward the sun. During parts of this cycle— which can last tens of thousands of years—each of the Earth’s hemispheres gets a little more, or a little less, solar radiation than they’re used to. And that is where the fun begins. Milanković’s theory initially assumed that a tilt of the Earth’s hemispheres caused ravenous winters cold enough to turn the planet into ice. But a Russian meteorologist named Wladimir Köppen dug deeper into Milanković’s work and discovered a fascinating nuance. Moderately cool summers, not cold winters, were the icy culprit. It begins when a summer never gets warm enough to melt the previous winter’s snow. The leftover ice base makes it easier for snow to accumulate the following winter, which increases the odds of snow sticking around in the following summer, which attracts even more accumulation the following winter. Perpetual snow reflects more of the sun’s rays, which exacerbates cooling, which brings more snowfall, and on and on. Within a few hundred years a seasonal snowpack grows into a continental ice sheet, and you’re off to the races. (Location 573)
you don’t need tremendous force to create tremendous results. (Location 590)
Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him. (Location 598)
Jim Simons, head of the hedge fund Renaissance Technologies, has compounded money at 66% annually since 1988. (Location 612)
The practical takeaway is that the counterintuitiveness of compounding may be responsible for the majority of disappointing trades, bad strategies, and successful investing attempts. (Location 646)
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. (Location 649)
Good investing is not necessarily about making good decisions. It’s about consistently not screwing up. (Location 655)
The blockbusters stopped, a few big-budget projects flopped, and by the mid-1990s Carolco was history. It went bankrupt in 1996. Stock goes to zero, have a nice day. A catastrophic loss. And one that 4 in 10 public companies experience over time. Carolco’s story is not worth telling because it’s unique, but because it’s common. Here’s the most important part of this story: The Russell 3000 has increased more than 73-fold since 1980. That is a spectacular return. That is success. (Location 865)
Note: Story
Forty percent of the companies in the index were effectively failures. But the 7% of components that performed extremely well were more than enough to offset the duds. (Location 869)
Not only do a few companies account for most of the market’s return, but within those companies are even more tail events. (Location 871)
The idea that a few things account for most results is not just true for companies in your investment portfolio. It’s also an important part of your own behavior as an investor. (Location 879)
Over the course of your lifetime as an investor the decisions that you make today or tomorrow or next week will not matter nearly as much as what you do during the small number of days—likely 1% of the time or less—when everyone else around you is going crazy. (Location 884)
Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control. (Location 901)
When you accept that tails drive everything in business, investing, and finance you realize that it’s normal for lots of things to go wrong, break, fail, and fall. (Location 904)
If you’re a good investor most years will be just OK, and plenty will be bad. (Location 907)
There are fields where you must be perfect every time. Flying a plane, for example. Then there are fields where you want to be at least pretty good nearly all the time. A restaurant chef, let’s say. Investing, business, and finance are just not like these fields. Something I’ve learned from both investors and entrepreneurs is that no one makes good decisions all the time. The most impressive people are packed full of horrendous ideas that are often acted upon. (Location 911)
At the Berkshire Hathaway shareholder meeting in 2013 Warren Buffett said he’s owned 400 to 500 stocks during his life and made most of his money on 10 of them. (Location 939)
“It’s not whether you’re right or wrong that’s important,” George Soros once said, “but how much money you make when you’re right and how much you lose when you’re wrong.” You can be wrong half the time and still make a fortune. (Location 945)
The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays. (Location 957)
Angus Campbell was a psychologist at the University of Michigan. (Location 958)
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. (Location 964)
Money’s greatest intrinsic value—and this can’t be overstated— is its ability to give you control over your time. (Location 968)
Jonah Berger, a marketing professor at the University of Pennsylvania, summed it up well: People like to feel like they’re in control—in the drivers’ seat. When we try to get them to do something, they feel disempowered. Rather than feeling like they made the choice, they feel like we made it for them. So they say no or do something else, even when they might have originally been happy to go along. (Location 988)
If your job is to build cars, there is little you can do when you’re not on the assembly line. You detach from work and leave your tools in the factory. But if your job is to create a marketing campaign—a thought-based and decision job—your tool is your head, which never leaves you. You might be thinking about your project during your commute, as you’re making dinner, while you put your kids to sleep, and when you wake up stressed at three in the morning. You might be on the clock for fewer hours than you would in 1950. But it feels like you’re working 24/7. (Location 1033)
Compared to generations prior, control over your time has diminished. And since controlling your time is such a key happiness influencer, we shouldn’t be surprised that people don’t feel much happier even though we are, on average, richer than ever. (Location 1042)
What they did value were things like quality friendships, being part of something bigger than themselves, and spending quality, unstructured time with their children. “Your kids don’t want your money (or what your money buys) anywhere near as much as they want you. Specifically, they want you with them,” (Location 1053)
When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead, you think, “Wow, if I had that car people would think I’m cool.” Subconscious or not, this is how people think. (Location 1065)
“You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does—especially from the people you want to respect and admire you.” (Location 1070)
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. (Location 1080)
Spending money to show people how much money you have is the fastest way to have less money. (Location 1085)
Someone driving a 100,000carmightbewealthy.Buttheonlydatapointyouhaveabouttheirwealthisthattheyhave100,000 less than they did before they bought the car (or $100,000 more in debt). (Location 1096)
Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see. (Location 1101)
Investor Bill Mann once wrote: “There is no faster way to feel rich than to spend lots of money on really nice things. But the way to be rich is to spend money you have, and to not spend money you don’t have. It’s really that simple.”31 (Location 1109)
wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now. (Location 1117)
the hidden nature of wealth makes it hard to imitate others and learn from their ways. (Location 1134)
building wealth has little to do with your income or investment returns, and lots to do with your savings rate. (Location 1152)
In the 1970s the world looked like it was running out of oil. (Location 1154)
Note: Story on oil crisis. Start
We didn’t run out of oil, thank goodness. But that wasn’t just because we found more oil, or even got better at taking it out of the ground. The biggest reason we overcame the oil crisis is because we started building cars, factories, and homes that are more energy efficient than they used to be. (Location 1156)
Note: Story end
The United States uses 60% less energy per dollar of GDP today than it did in 1950.32 (Location 1158)
Note: Fun fact
The world grew its “energy wealth” not by increasing the energy it had, but by decreasing the energy it needed. (Location 1161)
finding more energy is largely out of our control and shrouded in uncertainty, (Location 1163)
becoming more efficient with the energy we use is largely in our control. (Location 1164)
Investment returns can make you rich. But whether an investing strategy will work, and how long it will work for, and whether markets will cooperate, is always in doubt. Results are shrouded in uncertainty. Personal savings and frugality—finance’s conservation and efficiency—are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future as they are today. (Location 1166)
If you view building wealth as something that will require more money or big investment returns, you may become as pessimistic as the energy doomers were in the 1970s. (Location 1170)
If you view it as powered by your own frugality and efficiency, the destiny is clearer. (Location 1172)
Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more. (Location 1173)
A high savings rate means having lower expenses than you otherwise could, and having lower expenses means your savings go farther than they would if you spent more. (Location 1182)
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. (Location 1185)
Everyone needs the basics. Once they’re covered there’s another level of comfortable basics, and past that there’s basics that are both comfortable, entertaining, and enlightening. 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. (Location 1191)
Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you. (Location 1200)
you don’t need a specific reason to save. (Location 1203)
Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment. (Location 1207)
In a world where intelligence is hyper-competitive and many previous technical skills have become automated, competitive advantages tilt toward nuanced and soft skills—like communication, empathy, and, perhaps most of all, flexibility. (Location 1237)
Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money. (Location 1253)
Julius Wagner-Jauregg was a 19th-century psychiatrist with two unique skills: (Location 1256)
Note: Story start
His specialty was patients with severe neurosyphilis—then a fatal diagnosis with no known treatment. He began noticing a pattern: syphilis patients tended to recover if they had the added misfortune of having prolonged fevers from an unrelated ailment. (Location 1257)
In the early 1900s Wagner-Jauregg began injecting patients with low-end strains of typhoid, malaria, and smallpox to trigger fevers strong enough to kill off their syphilis. (Location 1261)
He eventually settled on a weak version of malaria, since it could be effectively countered with quinine after a few days of bone-rattling fevers. After some tragic trial and error his experiment worked. Wagner-Jauregg reported that 6 in 10 syphilis patients treated with “malariotherapy” recovered, compared to around 3 in 10 patients left alone. (Location 1263)
won the Nobel Prize in medicine in 1927. The organization today notes: “The main work that concerned Wagner-Jauregg throughout his working life was the endeavour to cure mental disease by inducing a fever.”33 (Location 1266)
Penicillin eventually made malariotherapy for syphilis patients obsolete, (Location 1268)
Fevers have always been as feared as they are mysterious. Ancient Romans worshiped Febris, the Goddess who protected people from fevers. Amulets were left at temples to placate her, hoping to stave off the next round of shivers. (Location 1270)
A one-degree increase in body temperature has been shown to slow the replication rate of some viruses by a factor of 200. (Location 1273)
Fever is almost universally seen as a bad thing. They’re treated with drugs like Tylenol to reduce them as quickly as they appear. Despite millions of years of evolution as a defense mechanism, no parent, no patient, few doctors, and certainly no drug company views fever as anything but a misfortune that should be eliminated. (Location 1279)
“Treatment of fever is common in the ICU setting and likely related to standard dogma rather than evidence-based practice.”36 Howard Markel, director of the Center for the History of Medicine, (Location 1282)
If fevers are beneficial, why do we fight them so universally? I don’t think it’s complicated: Fevers hurt. And people don’t want to hurt. (Location 1286)
A doctor’s goal is not just to cure disease. It’s to cure disease within the confines of what’s reasonable and tolerable to the patient. Fevers can have marginal benefits in fighting infection, but they hurt. (Location 1288)
It may be rational to want a fever if you have an infection. But it’s not reasonable. (Location 1291)
people do not want the mathematically optimal strategy. They want the strategy that maximizes for how well they sleep at night. (Location 1295)
Harry Markowitz won the Nobel Prize for exploring the mathematical tradeoff between risk and return. (Location 1296)
described his portfolio allocation in the 1950s, when his models were first developed: I visualized my grief if the stock market went way up and I wasn’t in it—or if it went way down and I was completely in it. My intention was to minimize my future regret. So I split my contributions 50/50 between bonds and equities. (Location 1297)
Note: Even he could not be rtional about his portfolio
One is that “minimizing future regret” is hard to rationalize on paper but easy to justify in real life. (Location 1301)
A rational investor makes decisions based on numeric facts. A reasonable investor makes them in a conference room surrounded by co-workers you want to think highly of you, with a spouse you don’t want to let down, or judged against the silly but realistic competitors that are your brother-in-law, your neighbor, and your own personal doubts. (Location 1302)
if lacking emotions about your strategy or the stocks you own increases the odds you’ll walk away from them when they become difficult, what looks like rational thinking becomes a liability. The reasonable investors who love their technically imperfect strategies have an edge, because they’re more likely to stick with those strategies. (Location 1326)
There are few financial variables more correlated to performance than commitment to a strategy during its lean years—both the amount of performance and the odds of capturing it over a given period of time. (Location 1328)
people prefer to invest in companies from the country they live in while ignoring the other 95%+ of the planet. It’s not rational, until you consider that investing is effectively giving money to strangers. If familiarity helps you take the leap of faith required to remain backing those strangers, it’s reasonable. (Location 1341)
“We do some things for family reasons,” Bogle told The Wall Street Journal. “If it’s not consistent, well, life isn’t always consistent.” (Location 1354)
Note: Quotation
New highlights added March 9, 2023 at 8:06 PM
History is mostly the study of surprising events. But it is often used by investors and economists as an unassailable guide to the future. (Location 1362)
It is smart to have a deep appreciation for economic and investing history. History helps us calibrate our expectations, study where people tend to go wrong, and offers a rough guide of what tends to work. But it is not, in any way, a map of the future. A trap many investors fall into is what I call “historians as prophets” fallacy: An overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress. (Location 1364)
If you view investing as a hard science, history should be a perfect guide to the future. Geologists can look at a billion years of historical data and form models of how the earth behaves. So can meteorologists. And doctors—kidneys operate the same way in 2020 as they did in 1020. But investing is not a hard science. It’s a massive group of people making imperfect decisions with limited information about things that will have a massive impact on their wellbeing, which can make even smart people nervous, greedy and paranoid. (Location 1368)
The mental trick we play on ourselves here is an over-admiration of people who have been there, done that, when it comes to money. Experiencing specific events does not necessarily qualify you to know what will happen next. In fact it rarely does, because experience leads to overconfidence more than forecasting ability. (Location 1380)
The most important events in historical data are the big outliers, the record-breaking events. They are what move the needle in the economy and the stock market. The Great Depression. World War II. The dot-com bubble. September 11th. The housing crash of the mid-2000s. A handful of outlier events play an enormous role because they influence so many unrelated events in their wake. (Location 1393)
Fifteen billion people were born in the 19th and 20th centuries. But try to imagine how different the global economy—and the whole world—would be today if just seven of them never existed: (Location 1396)
Note: Adolf Hitler
Mao Zedong
Joseph Stalin
Thomas Edison
Bill Gates
Martin Luther King
The thing that makes tail events easy to underappreciate is how easy it is to underestimate how things compound. How, for example, 9/11 prompted the Federal Reserve to cut interest rates, which helped drive the housing bubble, which led to the financial crisis, which led to a poor jobs market, which led tens of millions to seek a college education, which led to $1.6 trillion in student loans with a 10.8% default rate. It’s not intuitive to link 19 hijackers to the current weight of student loans, but that’s what happens in a world driven by a few outlier tail events. The majority of what’s happening at any given moment in the global economy can be tied back to a handful of past events that were nearly impossible to predict. (Location 1407)
The most common plot of economic history is the role of surprises. The reason surprises occur is not because our models are wrong or our intelligence is low. It’s because the odds that Adolf Hitler’s parents argued on the evening nine months before he was born were the same as them conceiving a child. Technology is hard to predict because Bill Gates may have died from polio if Jonas Salk got cranky and gave up on his quest to find a vaccine. The reason we couldn’t predict the student loan growth is because an airport security guard may have confiscated a hijacker’s knife on 9/11. That’s all there is to it. (Location 1413)
The correct lesson to learn from surprises is that the world is surprising. Not that we should use past surprises as a guide to future boundaries; that we should use past surprises as an admission that we have no idea what might happen next. (Location 1432)
The most important economic events of the future—things that will move the needle the most—are things that history gives us little to no guide about. They will be unprecedented events. Their unprecedented nature means we won’t be prepared for them, which is part of what makes them so impactful. This is true for both scary events like recessions and wars, and great events like innovation. (Location 1434)
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. Many investors and economists take comfort in knowing their forecasts are backed up by decades, even centuries, of data. But since economies evolve, recent history is often the best guide to the future, because it’s more likely to include important conditions that are relevant to the future. (Location 1495)
That doesn’t mean we should ignore history when thinking about money. But there’s an important nuance: The further back in history you look, the more general your takeaways should be. General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tend to be stable in time. The history of money is useful for that kind of stuff. But specific trends, specific trades, specific sectors, specific causal relationships about markets, and what people should do with their money are always an example of evolution in progress. Historians are not prophets. (Location 1504)
The wisdom in having room for error is acknowledging that uncertainty, randomness, and chance—“unknowns”—are an ever-present part of life. The only way to deal with them is by increasing the gap between what you think will happen and what can happen while still leaving you capable of fighting another day. (Location 1536)
Margin of safety—you can also call it room for error or redundancy—is the only effective way to safely navigate a world that is governed by odds, not certainties. And almost everything related to money exists in that kind of world. Forecasting with precision is hard. This is obvious to the card counter, because no one could possibly know where a particular card lies in a shuffled deck. It’s less obvious to someone asking, “What will the average annual return of the stock market be over the next 10 years?” or “On what date will I be able to retire?” But they are fundamentally the same. The best we can do is think about odds. (Location 1542)
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. So the person with enough room for error in part of their strategy (cash) to let them endure hardship in another (stocks) has an edge over the person who gets wiped out, game over, insert more tokens, when they’re wrong. (Location 1561)
One is volatility. Can you survive your assets declining by 30%? On a spreadsheet, maybe yes—in terms of actually paying your bills and staying cash-flow positive. But what about mentally? It is easy to underestimate what a 30% decline does to your psyche. Your confidence may become shot at the very moment opportunity is at its highest. You—or your spouse—may decide it’s time for a new plan, or new career. I know several investors who quit after losses because they were exhausted. Physically exhausted. Spreadsheets are good at telling you when the numbers do or don’t add up. They’re not good at modeling how you’ll feel when you tuck your kids in at night wondering if the investment decisions you’ve made were a mistake that will hurt their future. Having a gap between what you can technically endure versus what’s emotionally possible is an overlooked version of room for error. (Location 1571)
Another is saving for retirement. We can look at history and see, for example, that the U.S. stock market has returned an annual average of 6.8% after inflation since the 1870s. It’s a reasonable first approximation to use that as an estimate of what to expect on your own diversified portfolio when saving for retirement. You can use those return assumptions to back into the amount of money you’ll need to save each month to achieve your target nestegg. But what if future returns are lower? Or what if long-term history is a good estimate of the long-term future, but your target retirement date ends up falling in the middle of a brutal bear market, like 2009? What if a future bear market scares you out of stocks and you end up missing a future bull market, so the returns you actually earn are less than the market average? What if you need to cash out your retirement accounts in your 30s to pay for a medical mishap? (Location 1578)
For my own investments, which I’ll describe more in chapter 20, I assume the future returns I’ll earn in my lifetime will be ⅓ lower than the historic average. So I save more than I would if I assumed the future will resemble the past. It’s my margin of safety. The future may be worse than ⅓ lower than the past, but no margin of safety offers a 100% guarantee. A one-third buffer is enough to allow me to sleep well at night. And if the future does resemble the past, I’ll be pleasantly surprised. “The best way to achieve felicity is to aim low,” says Charlie Munger. (Location 1586)
The idea is that you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking. The odds are in your favor when playing Russian roulette. But the downside is not worth the potential upside. There is no margin of safety that can compensate for the risk. (Location 1594)
I just want to ensure I can remain standing long enough for my risks to pay off. You have to survive to succeed. (Location 1607)
You can plan for every risk except the things that are too crazy to cross your mind. And those crazy things can do the most harm, because they happen more often than you think and you have no plan for how to deal with them. In 2006 Warren Buffett announced a search for his eventual replacement. He said he needed someone “genetically programmed to recognize and avoid serious risks, including those never before encountered.” (Location 1619)
A good rule of thumb for a lot of things in life is that everything that can break will eventually break. So if many things rely on one thing working, and that thing breaks, you are counting the days to catastrophe. That’s a single point of failure. (Location 1634)
you don’t need a specific reason to save. It’s fine to save for a car, or a home, or for retirement. But it’s equally important to save for things you can’t possibly predict or even comprehend— (Location 1642)
things change— both the world around you, and your own goals and desires. It is one thing to say, “We don’t know what the future holds.” It’s another to admit that you, yourself, don’t know today what you will even want in the future. And the truth is, few of us do. It’s hard to make enduring long-term decisions when your view of what you’ll want in the future is likely to shift. (Location 1680)
The End of History Illusion is what psychologists call the tendency for people to be keenly aware of how much they’ve changed in the past, but to underestimate how much their personalities, desires, and goals are likely to change in the future. Harvard psychologist Daniel Gilbert once said: At every stage of our lives we make decisions that will profoundly influence the lives of the people we’re going to become, and then when we become those people, we’re not always thrilled with the decisions we made. So young people pay good money to get tattoos removed that teenagers paid good money to get. Middle-aged people rushed to divorce people who young adults rushed to marry. Older adults work hard to lose what middle-aged adults worked hard to gain. On and on and on. (Location 1683)
Gilbert’s research shows people from age 18 to 68 underestimate how much they will change in the future. (Location 1692)
We should avoid the extreme ends of financial planning. Assuming you’ll be happy with a very low income, or choosing to work endless hours in pursuit of a high one, increases the odds that you’ll one day find yourself at a point of regret. (Location 1704)
Compounding works best when you can give a plan years or decades to grow. This is true for not only savings but careers and relationships. Endurance is key. And when you consider our tendency to change who we are over time, balance at every point in your life becomes a strategy to avoid future regret and encourage endurance. (Location 1710)
Aiming, at every point in your working life, to have moderate annual savings, moderate free time, no more than a moderate commute, and at least moderate time with your family, increases the odds of being able to stick with a plan and avoid regret than if any one of those things fall to the extreme sides of the spectrum. (Location 1713)
We should also come to accept the reality of changing our minds. Some of the most miserable workers I’ve met are people who stay loyal to a career only because it’s the field they picked when deciding on a college major at age 18. When you accept the End of History Illusion, you realize that the odds of picking a job when you’re not old enough to drink that you will still enjoy when you’re old enough to qualify for Social Security are low. (Location 1715)
“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.’” (Location 1725)
Note: Said by Daniel kahneman
Sunk costs—anchoring decisions to past efforts that can’t be refunded—are a devil in a world where people change over time. They make our future selves prisoners to our past, different, selves. It’s the equivalent of a stranger making major life decisions for you. (Location 1727)
Embracing the idea that financial goals made when you were a different person should be abandoned without mercy versus put on life support and dragged on can be a good strategy to minimize future regret. (Location 1730)
Most things are harder in practice than they are in theory. Sometimes this is because we’re overconfident. More often it’s because we’re not good at identifying what the price of success is, which prevents us from being able to pay it. (Location 1753)
“Hold stocks for the long run,” you’ll hear. It’s good advice. But do you know how hard it is to maintain a long-term outlook when stocks are collapsing? Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret—all of which are easy to overlook until you’re dealing with them in real time. (Location 1757)
the bigger the returns, the higher the price. Netflix stock returned more than 35,000% from 2002 to 2018, but traded below its previous all-time high on 94% of days. Monster Beverage returned 319,000% from 1995 to 2018—among the highest returns in history—but traded below its previous high 95% of the time during that period. (Location 1770)
Many people in investing choose the third option. Like a car thief—though well-meaning and law-abiding—they form tricks and strategies to get the return without paying the price. They trade in and out. They attempt to sell before the next recession and buy before the next boom. Most investors with even a little experience know that volatility is real and common. Many then take what seems like the next logical step: trying to avoid it. (Location 1776)
The price of investing success is not immediately obvious. It’s not a price tag you can see, so when the bill comes due it doesn’t feel like a fee for getting something good. It feels like a fine for doing something wrong. And while people are generally fine with paying fees, fines are supposed to be avoided. You’re supposed to make decisions that preempt and avoid fines. Traffic fines and IRS fines mean you did something wrong and deserve to be punished. The natural response for anyone who watches their wealth decline and views that drop as a fine is to avoid future fines. It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor. Few investors have the disposition to say, “I’m actually fine if I lose 20% of my money.” This is doubly true for new investors who have never experienced a 20% decline. (Location 1810)
Market returns are never free and never will be. They demand you pay a price, like any other product. You’re not forced to pay this fee, just like you’re not forced to go to Disneyland. You can go to the local county fair where tickets might be $10, or stay home for free. You might still have a good time. But you’ll usually get what you pay for. Same with markets. The volatility/uncertainty fee—the price of returns—is the cost of admission to get returns greater than low-fee parks like cash and bonds. The trick is convincing yourself that the market’s fee is worth it. That’s the only way to properly deal with volatility and uncertainty—not just putting up with it, but realizing that it’s an admission fee worth paying. (Location 1822)
When investors have different goals and time horizons—and they do in every asset class—prices that look ridiculous to one person can make sense to another, because the factors those investors pay attention to are different. (Location 1860)
An iron rule of finance is that money chases returns to the greatest extent that it can. If an asset has momentum—it’s been moving consistently up for a period of time—it’s not crazy for a group of short-term traders to assume it will keep moving up. Not indefinitely; just for the short period of time they need it to. Momentum attracts short-term traders in a reasonable way. (Location 1866)
Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long term to mostly short term. That process feeds on itself. As traders push up short-term returns, they attract even more traders. Before long—and it often doesn’t take long—the dominant market price-setters with the most authority are those with shorter time horizons. Bubbles aren’t so much about valuations rising. That’s just a symptom of something else: time horizons shrinking as more short-term traders enter the playing field. It’s common to say the dot-com bubble was a time of irrational optimism about the future. But one of the most common headlines of that era was announcing record trading volume, which is what happens when investors are buying and selling in a single day. Investors—particularly the ones setting prices—were not thinking about the next 20 years. The average mutual fund had 120% annual turnover in 1999, meaning they were, at most, thinking about the next eight months. (Location 1869)
Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another. (Location 1900)
Cisco stock rose 300% in 1999 to 60pershare.Atthatpricethecompanywasvaluedat600 billion, which is insane. Few actually thought it was worth that much; the day-traders were just having their fun. Economist Burton Malkiel once pointed out that Cisco’s implied growth rate at that valuation meant it would become larger than the entire U.S. economy within 20 years. But if you were a long-term investor in 1999, $60 was the only price available to buy. And many people were buying it at that price. So you may have looked around and said to yourself, “Wow, maybe these other investors know something I don’t.” Maybe you went along with it. You even felt smart about it. What you don’t realize is that the traders who were setting the marginal price of the stock were playing a different game than you were. Sixty dollars a share was a reasonable price for the traders, because they planned on selling the stock before the end of the day, when its price would probably be higher. But sixty dollars was a disaster in the making for you, because you planned on holding shares for the long run. (Location 1901)
It’s hard to grasp that other investors have different goals than we do, because an anchor of psychology is not realizing that rational people can see the world through a different lens than your own. (Location 1917)
But while we can see how much money other people spend on cars, homes, clothes, and vacations, we don’t get to see their goals, worries, and aspirations. A young lawyer aiming to be a partner at a prestigious law firm might need to maintain an appearance that I, a writer who can work in sweatpants, have no need for. But when his purchases set my own expectations, I’m wandering down a path of potential disappointment because I’m spending the money without the career boost he’s getting. We might not even have different styles. We’re just playing a different game. (Location 1922)
A takeaway here is that few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are. (Location 1927)
OPTIMISM IS THE best bet for most people because the world tends to get better for most people most of the time. (Location 1942)
Real optimists don’t believe that everything will be great. That’s complacency. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way. The simple idea that most people wake up in the morning trying to make things a little better and more productive than wake up looking to cause trouble is the foundation of optimism. It’s not complicated. It’s not guaranteed, either. (Location 1946)
Pessimism just sounds smarter and more plausible than optimism. (Location 1978)
If a smart person tells me they have a stock pick that’s going to rise 10-fold in the next year, I will immediately write them off as full of nonsense. If someone who’s full of nonsense tells me that a stock I own is about to collapse because it’s an accounting fraud, I will clear my calendar and listen to their every word. (Location 1980)
Note: How pessimism is given so much importance
John Stuart Mill wrote in the 1840s: “I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.” (Location 1997)
Kahneman says the asymmetric aversion to loss is an evolutionary shield. He writes: When directly compared or weighted against each other, losses loom larger than gains. This asymmetry between the power of positive and negative expectations or experiences has an evolutionary history. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce. (Location 2003)
There are two topics that will affect your life whether you are interested in them or not: money and health. While health issues tend to be individual, money issues are more systemic. In a connected system where one person’s decisions can affect everyone else, it’s understandable why financial risks gain a spotlight and capture attention in a way few other topics can. (Location 2027)
pessimists often extrapolate present trends without accounting for how markets adapt. (Location 2031)
There is an iron law in economics: extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways. (Location 2035)
Assuming that something ugly will stay ugly is an easy forecast to make. And it’s persuasive, because it doesn’t require imagining the world changing. But problems correct and people adapt. Threats incentivize solutions in equal magnitude. That’s a common plot of economic history that is too easily forgotten by pessimists who forecast in straight lines. (Location 2050)
progress happens too slowly to notice, but setbacks happen too quickly to ignore. (Location 2054)
It’s easier to create a narrative around pessimism because the story pieces tend to be fresher and more recent. Optimistic narratives require looking at a long stretch of history and developments, which people tend to forget and take more effort to piece together. (Location 2081)
There was one change the alien couldn’t see between 2007 and 2009: The stories we told ourselves about the economy. In 2007, we told a story about the stability of housing prices, the prudence of bankers, and the ability of financial markets to accurately price risk. In 2009 we stopped believing that story. That’s the only thing that changed. But it made all the difference in the world. Once the narrative that home prices will keep rising broke, mortgage defaults rose, then banks lost money, then they reduced lending to other businesses, which led to layoffs, which led to less spending, which led to more layoffs, and on and on. (Location 2130)
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. (Location 2145)
Investing is one of the only fields that offers daily opportunities for extreme rewards. People believe in financial quackery in a way they never would for, say, weather quackery because the rewards for correctly predicting what the stock market will do next week are in a different universe than the rewards for predicting whether it will be sunny or rainy next week. (Location 2178)
New highlights added March 9, 2023 at 8:34 PM
When thinking about room for error in a forecast it is tempting to think that potential outcomes range from you being just right enough to you being very, very right. But the biggest risk is that you want something to be true so badly that the range of your forecast isn’t even in the same ballpark as reality. (Location 2191)
Just like my daughter, I don’t know what I don’t know. So I am just as susceptible to explaining the world through the limited set of mental models I have at my disposal. Like her, I look for the most understandable causes in everything I come across. And, like her, I’m wrong about a lot of them, because I know a lot less about how the world works than I think I do. (Location 2218)
Most people, when confronted with something they don’t understand, do not realize they don’t understand it because they’re able to come up with an explanation that makes sense based on their own unique perspective and experiences in the world, however limited those experiences are. We all want the complicated world we live in to make sense. So we tell ourselves stories to fill in the gaps of what are effectively blind spots. (Location 2231)
Think about market forecasts. We’re very, very bad at them. I once calculated that if you just assume that the market goes up every year by its historic average, your accuracy is better than if you follow the average annual forecasts of the top 20 market strategists from large Wall Street banks. Our ability to predict recessions isn’t much better. And since big events come out of nowhere, forecasts may do more harm than good, giving the illusion of predictability in a world where unforeseen events control most outcomes. (Location 2240)
Wanting to believe we are in control is an emotional itch that needs to be scratched, rather than an analytical problem to be calculated and solved. The illusion of control is more persuasive than the reality of uncertainty. So we cling to stories about outcomes being in our control. (Location 2249)
Part of this has to do with confusing fields of precision with fields of uncertainty. NASA’s New Horizons spacecraft passed by Pluto two years ago. It was a three-billion mile trip that took nine and a half years. According to NASA, the trip “took about one minute less than predicted when the craft was launched in January 2006.”68 Think about that. In an untested, decade-long journey, NASA’s forecast was 99.99998% accurate. That’s like forecasting a trip from New York to Boston and being accurate to within four millionths of a second. But astrophysics is a field of precession. It isn’t impacted by the vagaries of human behavior and emotions, like finance is. Business, economics, and investing, are fields of uncertainty, overwhelmingly driven by decisions that can’t easily be explained with clean formulas, like a trip to Pluto can. But we desperately want it to be like a trip to Pluto, because the idea of a NASA engineer being in 99.99998% control of an outcome is beautiful and comforting. It’s so comforting that we’re tempted to tell ourselves stories about how much control we have in other parts of our life, like money. (Location 2251)
I can’t tell you what to do with your money, because I don’t know you. I don’t know what you want. I don’t know when you want it. I don’t why you want it. (Location 2310)
wealth is created by suppressing what you could buy today in order to have more stuff or more options in the future. No matter how much you earn, you will never build wealth unless you can put a lid on how much fun you can have with your money right now, today. (Location 2322)
Manage your money in a way that helps you sleep at night. (Location 2325)
Time is the most powerful force in investing. It makes little things grow big and big mistakes fade away. (Location 2329)
you should always measure how you’ve done by looking at your full portfolio, rather than individual investments. It is fine to have a large chunk of poor investments and a few outstanding ones. (Location 2333)
Save. Just save. You don’t need a specific reason to save. (Location 2341)
You should like risk because it pays off over time. But you should be paranoid of ruinous risk because it prevents you from taking future risks that will pay off over time. (Location 2352)
Respect the mess. Smart, informed, and reasonable people can disagree in finance, because people have vastly different goals and desires. There is no single right answer; just the answer that works for you. (Location 2355)
Doctors] don’t die like the rest of us,” he wrote. “What’s unusual about them is not how much treatment they get compared to most Americans, but how little. For all the time they spend fending off the deaths of others, they tend to be fairly serene when faced with death themselves. They know exactly what is going to happen, they know the choices, and they generally have access to any sort of medical care they could want. But they go gently.” A doctor may throw the kitchen sink at her patient’s cancer, but choose palliative care for herself. (Location 2371)
The difference between what someone suggests you do and what they do for themselves isn’t always a bad thing. It just underscores that when dealing with complicated and emotional issues that affect you and your family, there is no one right answer. There is no universal truth. There’s only what works for you and your family, checking the boxes you want checked in a way that leaves you comfortable and sleeping well at night. (Location 2375)
Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want. (Location 2395)
We own our house without a mortgage, which is the worst financial decision we’ve ever made but the best money decision we’ve ever made. Mortgage interest rates were absurdly low when we bought our house. Any rational advisor would recommend taking advantage of cheap money and investing extra savings in higher-return assets, like stocks. But our goal isn’t to be coldly rational; just psychologically reasonable. The independent feeling I get from owning our house outright far exceeds the known financial gain I’d get from leveraging our assets with a cheap mortgage. Eliminating the monthly payment feels better than maximizing the long-term value of our assets. It makes me feel independent. I don’t try to defend this decision to those pointing out its flaws, or those who would never do the same. On paper it’s defenseless. But it works for us. We like it. That’s what matters. Good decisions aren’t always rational. At some point you have to choose between being happy or being “right.” (Location 2417)
We also keep a higher percentage of our assets in cash than most financial advisors would recommend—something around 20% of our assets outside the value of our house. This is also close to indefensible on paper, and I’m not recommending it to others. It’s just what works for us. We do it because cash is the oxygen of independence, and— more importantly—we never want to be forced to sell the stocks we own. We want the probability of facing a huge expense and needing to liquidate stocks to cover it to be as close to zero as possible. (Location 2425)
I’m saving for a world where curveballs are more common than we expect. Not being forced to sell stocks to cover an expense also means we’re increasing the odds of letting the stocks we own compound for the longest period of time. Charlie Munger put it well: “The first rule of compounding is to never interrupt it unnecessarily.” (Location 2432)
I’ve shifted my views and now every stock we own is a low-cost index fund. I don’t have anything against actively picking stocks, either on your own or through giving your money to an active fund manager. I think some people can outperform the market averages—it’s just very hard, and harder than most people think. (Location 2439)
Beating the market should be hard; the odds of success should be low. If they weren’t, everyone would do it, and if everyone did it there would be no opportunity. So no one should be surprised that the majority of those trying to beat the market fail to do so. (Location 2447)
If you can meet all your goals without having to take the added risk that comes from trying to outperform the market, then what’s the point of even trying? I can afford to not be the greatest investor in the world, but I can’t afford to be a bad one. When I think of it that way, the choice to buy the index and hold on is a no-brainer for us. (Location 2454)
Effectively all of our net worth is a house, a checking account, and some Vanguard index funds. (Location 2460)
One of my deeply held investing beliefs is that there is little correlation between investment effort and investment results. The reason is because the world is driven by tails—a few variables account for the majority of returns. No matter how hard you try at investing you won’t do well if you miss the two or three things that move the needle in your strategy. The reverse is true. Simple investment strategies can work great as long as they capture the few things that are important to that strategy’s success. (Location 2462)
It relies on a high savings rate, patience, and optimism that the global economy will create value over the next several decades. I spend virtually all of my investing effort thinking about those three things— (Location 2466)
