The Psychology of Money

Key Takeaways

Highlights captured below. Synthesis pending — write takeaways from the Highlights section when ready.

Connections

Books:

• The Intelligent Investor — Housel praises it as full of wisdom but questionable as a how-to guide; source of Graham’s Margin of Safety concept.
• Thinking, Fast and Slow — Kahneman’s book; Housel relays Zweig’s “I have no sunk costs” anecdote from their work together.
• Fooled by Randomness — Taleb on the high-water-mark fallacy (the Nile, Fukushima).
• The Rational Optimist — Matt Ridley on the constant drumbeat of pessimism that drowns out any triumphalist song.
• Factfulness — Hans Rosling on people overestimating how frightening the world is.
• Sapiens — connects to Housel’s argument that shared narratives are the most powerful force in the economy.
• The Righteous Mind — Kyle’s note links Housel’s point about becoming financially and mentally invested in a “tribe” once you pick a side.

Concepts:

• Margin of Safety — “room for error” renders the forecast unnecessary; one of finance’s most underappreciated forces.
• Compounding — time is Buffett’s real secret; linear vs. exponential thinking.
• Tail Events — a small number of events account for the majority of outcomes (VC returns, the index, tail careers).
• Enough — the Bogle/Heller/Vonnegut story; getting the goalpost to stop moving is the hardest financial skill.
• Post-Mortems — we see finished products, not the losses behind tail successes.
• Forecasting — the “historians as prophets” fallacy; market forecasts as a whole are neither accurate nor useful.
• Storytelling — stories are the most powerful force in the economy; 2009 was “narrative damage” we inflicted on ourselves.
• Confirmation Bias — the more you want something to be true, the more likely you are to believe a story that overestimates its odds (per Kyle’s note).
• Frugality — staying wealthy requires frugality and paranoia; savings is the gap between ego and income.
• Financial Independence — independence as Housel’s top goal; cash is “the oxygen of independence.”
• Personal Finance — building wealth depends on savings rate far more than income or investment returns.
• Investment Returns — little correlation between investment effort and results; survival and longevity drive the biggest returns.

People:

• Morgan Housel — author.
• Warren Buffett — survival + longevity as the engine of compounding; “ample cash” pledge to Berkshire Hathaway shareholders.
• Charlie Munger — “I did not intend to get rich. I just wanted to get independent.”
• Bill Gates — luck of attending a high school with a computer; Microsoft’s conservative year-of-payroll cash buffer.
• Nassim Taleb — “avoid ruin at all costs”; risk-loving yet ruin-averse.
• Daniel Kahneman — hindsight illusion; “no sunk costs”; overconfidence of founders.
• Jason Zweig — annotated Graham; chronicled Kahneman’s self-revision habit.
• John Bogle — Vanguard founder; the “enough” story about Heller and Vonnegut.
• Paul Graham — 2016 note on three TV stations equalizing culture.
• George Soros — “It’s not whether you’re right or wrong… but how much you make/lose.”
• Mark Zuckerberg — turning down Yahoo’s 2006 $1B offer, cited as a case where luck and skill are hard to separate.
• Richard Feynman — “Imagine how much harder physics would be if electrons had feelings.”
• Packy McCormick — Kyle’s note connecting Housel’s narrative argument to “people want to be part of a story.”

Highlights

• “A genius is the man who can do the average thing when everyone else around him is losing his mind.”—Napoleon
• “The world is full of obvious things which nobody by any chance ever observes.”—Sherlock Holmes
• The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people.
• The fascinating thing about these stories is how unique they are to finance. In what other industry does someone with no college degree, no training, no background, no formal experience, and no connections massively outperform someone with the best education, the best training, and the best connections?
• It is impossible to think of a story about Ronald Read performing a heart transplant better than a Harvard-trained surgeon. Or designing a skyscraper superior to the best-trained architects. There will never be a story of a janitor outperforming the world’s top nuclear engineers.
• But these stories do happen in investing.
• One, financial outcomes are driven by luck, independent of intelligence and effort. That’s true to some extent, and this book will discuss it in further detail. Or, two (and I think more common), that financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.
• Two topics impact everyone, whether you are interested in them or not: health and money.
• Finance has scooped up the smartest minds coming from top universities over the last two decades.
• Is there any evidence it has made us better investors? I have seen none.
• Most of the reason why, I believe, is that we think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance).
• To write about what was happening, I wanted to figure out what was happening.
• Engineers can determine the cause of a bridge collapse because there’s agreement that if a certain amount of force is applied to a certain area, that area will break. Physics isn’t controversial. It’s guided by laws. Finance is different. It’s guided by people’s behaviors. And how I behave might make sense to me but look crazy to you.
• 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.
• I love Voltaire’s observation that “History never repeats itself; man always does.”
• It’s not a long book. You’re welcome. Most readers don’t finish the books they begin because most single topics don’t require 300 pages of explanation.
• So all of us—you, me, everyone—go through life anchored to a set of views about how money works that vary wildly from person to person. What seems crazy to you might make sense to me.
• 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.
• The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty.
• Studying history makes you feel like you understand something. But until you’ve lived through it and personally felt its consequences, you may not understand it enough to change your behavior.
• 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.
• 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.
• Dogs were domesticated 10,000 years ago and still retain some behaviors of their wild ancestors. Yet here we are, with between 20 and 50 years of experience in the modern financial system, hoping to be perfectly acclimated.
• One in a million high-school-age students attended the high school that had the combination of cash and foresight to buy a computer. Bill Gates happened to be one of them.
• 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.
• 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.
• The cover of Forbes magazine does not celebrate poor investors who made good decisions but happened to experience the unfortunate side of risk. But it almost certainly celebrates rich investors who made OK or even reckless decisions and happened to get lucky. Both flipped the same coin that happened to land on a different side.
• You can praise Vanderbilt for flouting the law with as much passion as you criticize Enron for doing the same. Perhaps one got lucky by avoiding the arm of the law while the other found itself on the side of risk.
• But when does the narrative shift from, “You didn’t let outdated laws get in the way of innovation,” to “You committed a crime?” Or how little would the story have to shift for the narrative to have turned from “Rockefeller was a genius, try to learn from his successes,” to “Rockefeller was a criminal, try to learn from his business failures.” Very little.
• Graham wrote about his GEICO bonanza: “One lucky break, or one supremely shrewd decision—can we tell them apart?” Not easily.
• We similarly think Mark Zuckerberg is a genius for turning down Yahoo!’s 2006 $1 billion offer to buy his company. He saw the future and stuck to his guns. But people criticize Yahoo! with as much passion for turning down its own big buyout offer from Microsoft—those fools should have cashed out while they could! What is the lesson for entrepreneurs here? I have no idea, because risk and luck are so hard to pin down.
• Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
• Therefore, focus less on specific individuals and case studies and more on broad patterns.
• My favorite historian, Frederick Lewis Allen, spent his career depicting the life of the average, median American—how they lived, how they changed, what they did for work, what they ate for dinner, etc. There are more relevant lessons to take away from this kind of broad observation than there are in studying the extreme characters that tend to dominate the news.
• 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.
• John Bogle, the Vanguard founder who passed away in 2019, once told a story about money that highlights something we don’t think about enough: At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, “Yes, but I have something he will never have … enough.” Enough. I was stunned by the simple eloquence of that word—stunned for two reasons: first, because I have been given so much in my own life and, second, because Joseph Heller couldn’t have been more accurate. For a critical element of our society, including many of the wealthiest and most powerful among us, there seems to be no limit today on what enough entails.
• The question we should ask of both Gupta and Madoff is why someone worth hundreds of millions of dollars would be so desperate for more money that they risked everything in pursuit of even more.
• There is no reason to risk what you have and need for what you don’t have and don’t need.
• The hardest financial skill is getting the goalpost to stop moving.
• It gets dangerous when the taste of having more—more money, more power, more prestige—increases ambition faster than satisfaction.
• Social comparison is the problem here.
• The point is that the ceiling of social comparison is so high that virtually no one will ever hit it. Which means it’s a battle that can never be won, or that the only way to win is to not fight to begin with—to accept that you might have enough, even if it’s less than those around you.
• “Enough” is not too little.
• There are many things never worth risking, no matter the potential gain.
• Reputation is invaluable. Freedom and independence are invaluable. Family and friends are invaluable. Being loved by those who you want to love you is invaluable. Happiness is invaluable. And your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them. Knowing when you have enough.
• If something compounds—if a little growth serves as the fuel for future growth—a small starting base can lead to results so extraordinary they seem to defy logic. It can be so logic-defying that you underestimate what’s possible, where growth comes from, and what it can lead to.
• You overestimate what you can do in a year and underestimate what you can do in 10 years because you’re not letting compounding work
• Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child.
• His skill is investing, but his secret is time.
• Linear thinking is so much more intuitive than exponential thinking. If I ask you to calculate 8+8+8+8+8+8+8+8+8 in your head, you can do it in a few seconds (it’s 72). If I ask you to calculate 8×8×8×8×8×8×8×8×8, your head will explode (it’s 134,217,728).
• If you were a technology optimist in the 1950s you may have predicted that practical storage would become 1,000 times larger. Maybe 10,000 times larger, if you were swinging for the fences. Few would have said “30 million times larger within my lifetime.” But that’s what happened.
• There are a million ways to get wealthy, and plenty of books on how to do so. But there’s only one way to stay wealthy: some combination of frugality and paranoia.
• If I had to summarize money success in a single word it would be “survival.”
• The Forbes 400 list of richest Americans has, on average, roughly 20% turnover per decade for causes that don’t have to do with death or transferring money to another family member.17
• 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. #Spirit of Humility
• Not “growth” or “brains” or “insight.” The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. This should be the cornerstone of your strategy, whether it’s in investing or your career or a business you own.
• We can spend years trying to figure out how Buffett achieved his investment returns: how he found the best companies, the cheapest stocks, the best managers. That’s hard. Less hard but equally important is pointing out what he didn’t do. He didn’t get carried away with debt. He didn’t panic and sell during the 14 recessions he’s lived through. He didn’t sully his business reputation. He didn’t attach himself to one strategy, one world view, or one passing trend. He didn’t rely on others’ money (managing investments through a public company meant investors couldn’t withdraw their capital). He didn’t burn himself out and quit or retire. He survived. Survival gave him longevity. And longevity—investing consistently from age 10 to at least age 89—is what made compounding work wonders. That single point is what matters most when describing his success.
• Nassim Taleb put it this way: “Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.”
• 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.
• Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.

  Kyle: Prepare for the worst and accept the best

• A plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality.
• The more you need specific elements of a plan to be true, the more fragile your financial life becomes.

  Kyle: Margin of safety. “What do I have to believe?”

• Room for error—often called margin of safety—is one of the most underappreciated forces in finance. It comes in many forms: A frugal budget, flexible thinking, and a loose timeline—anything that lets you live happily with a range of outcomes. #Margin of Safety
• A barbelled personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.
• Sensible optimism is a belief that the odds are in your favor, and over time things will balance out to a good outcome even if what happens in between is filled with misery.
• By age 20 the average person can lose roughly half the synaptic connections they had in their brain at age two, as inefficient and redundant neural pathways are cleared out. But the average 20-year-old is much smarter than the average two-year-old. Destruction in the face of progress is not only possible, but an efficient way to get rid of excess.
• Economies, markets, and careers often follow a similar path—growth amid loss.
• A mindset that can be paranoid and optimistic at the same time is hard to maintain, because seeing things as black or white takes less effort than accepting nuance. But you need short-term paranoia to keep you alive long enough to exploit long-term optimism.

  Kyle: F. Scott Fitzgerald - two opposing ideas in your head

• “I’ve been banging away at this thing for 30 years. I think the simple math is, some projects work and some don’t. There’s no reason to belabor either one. Just get on to the next.”—Brad Pitt accepting a Screen Actors Guild Award
• “The great investors bought vast quantities of art,” the firm writes.19 “A subset of the collections turned out to be great investments, and they were held for a sufficiently long period of time to allow the portfolio return to converge upon the return of the best elements in the portfolio. That’s all that happens.”
• Long tails—the farthest ends of a distribution of outcomes—have tremendous influence in finance, where a small number of events can account for the majority of outcomes.
• Investment firm Correlation Ventures once crunched the numbers.20 Out of more than 21,000 venture financings from 2004 to 2014: 65% lost money. Two and a half percent of investments made 10x–20x. One percent made more than a 20x return. Half a percent—about 100 companies out of 21,000—earned 50x or more. That’s where the majority of the industry’s returns come from.
• Apple was responsible for almost 7% of the index’s returns in 2018. And it is driven overwhelmingly by the iPhone, which in the world of tech products is as tail-y as tails get. And who’s working at these companies? Google’s hiring acceptance rate is 0.2%.22 Facebook’s is 0.1%.23 Apple’s is about 2%.24 So the people working on these tail projects that drive tail returns have tail careers.
• Napoleon’s definition of a military genius was, “The man who can do the average thing when all those around him are going crazy.” It’s the same in investing.
• There is the old pilot quip that their jobs are “hours and hours of boredom punctuated by moments of sheer terror.” It’s the same in investing. Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.
• 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.
• Part of why this isn’t intuitive is because in most fields we only see the finished product, not the losses incurred that led to the tail-success product. #Post-Mortems
• “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.”
• The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”
• The most powerful common denominator of happiness was simple. Campbell summed it up: 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.
• The hardest thing about this was that I loved the work. And I wanted to work hard. But doing something you love on a schedule you can’t control can feel the same as doing something you hate.
• There is a name for this feeling. Psychologists call it reactance. 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.25
• John D. Rockefeller was one of the most successful businessmen of all time. He was also a recluse, spending most of his time by himself. He rarely spoke, deliberately making himself inaccessible and staying quiet when you caught his attention. A refinery worker who occasionally had Rockefeller’s ear once remarked: “He lets everybody else talk, while he sits back and says nothing.” When asked about his silence during meetings, Rockefeller often recited a poem: A wise old owl lived in an oak, The more he saw the less he spoke, The less he spoke, the more he heard, Why aren’t we all like that wise old bird?
• 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.
• In his book 30 Lessons for Living, gerontologist Karl Pillemer interviewed a thousand elderly Americans looking for the most important lessons they learned from decades of life experience. He wrote: No one—not a single person out of a thousand—said that to be happy you should try to work as hard as you can to make money to buy the things you want. No one—not a single person—said it’s important to be at least as wealthy as the people around you, and if you have more than they do it’s real success. No one—not a single person—said you should choose your work based on your desired future earning power.
• “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,” Pillemer writes.
• There is a paradox here: people tend to want wealth to signal to others that they should be liked and admired. But in reality those other people often bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired.

  Kyle: No one thinks about you as much as you think about you

• 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.
• 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. That’s not how we think about wealth, because you can’t contextualize what you can’t see.
• Rich is a current income. Someone driving a $100,000 car is almost certainly rich, because even if they purchased the car with debt you need a certain level of income to afford the monthly payment. Same with those who live in big homes. It’s not hard to spot rich people. They often go out of their way to make themselves known. But 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.
• Diet and exercise offer a useful analogy. Losing weight is notoriously hard, even among those putting in the work of vigorous exercise. In his book The Body, Bill Bryson explains why: One study in America found that people overestimate the number of calories they burned in a workout by a factor of four. They also then consumed, on average, about twice as many calories as they had just burned off … the fact is, you can quickly undo a lot of exercise by eating a lot of food, and most of us do.
• Exercise is like being rich. You think, “I did the work and I now deserve to treat myself to a big meal.” Wealth is turning down that treat meal and actually burning net calories. It’s hard, and requires self-control. But it creates a gap between what you could do and what you choose to do that accrues to you over time.
• Imagine how hard it would be to learn how to write if you couldn’t read the works of great authors. Who would be your inspiration? Who would you admire? Whose nuanced tricks and tips would you follow? It would make something that is already hard even harder. It’s difficult to learn from what you can’t see. Which helps explain why it’s so hard for many to build wealth.
• The first idea—simple, but easy to overlook—is that building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
• 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.
• Past a certain level of income, what you need is just what sits below your ego.
• When you define savings as the gap between your ego and your income you realize why many people with decent incomes save so little. It’s a daily struggle against instincts to extend your peacock feathers to their outermost limits and keep up with others doing the same.
• Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.
• When you don’t have control over your time, you’re forced to accept whatever bad luck is thrown your way. But if you have flexibility you have the time to wait for no-brainer opportunities to fall in your lap. This is a hidden return on your savings.
• A hyper-connected world means the talent pool you compete in has gone from hundreds or thousands spanning your town to millions or billions spanning the globe. This is especially true for jobs that rely on working with your head versus your muscles: teaching, marketing, analysis, consulting, accounting, programming, journalism, and even medicine increasingly compete in global talent pools.
• A question you should ask as the range of your competition expands is, “How do I stand out?”
• Intelligence is not a reliable advantage in a world that’s become as connected as ours has. But flexibility is.
• One is that “minimizing future regret” is hard to rationalize on paper but easy to justify in real life. 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. Investing has a social component that’s often ignored when viewed through a strictly financial lens. The second is that this is fine. Jason Zweig, who conducted the interview when Markowitz described how he invested, later reflected: My own view is that people are neither rational nor irrational. We are human. We don’t like to think harder than we need to, and we have unceasing demands on our attention. Seen in that light, there’s nothing surprising about the fact that the pioneer of modern portfolio theory built his initial portfolio with so little regard for his own research. Nor is it surprising that he adjusted it later.38
• The historical odds of making money in U.S. markets are 50/50 over one-day periods, 68% in one-year periods, 88% in 10-year periods, and (so far) 100% in 20-year periods. Anything that keeps you in the game has a quantifiable advantage.
• Invest in a promising company you don’t care about, and you might enjoy it when everything’s going well. But when the tide inevitably turns you’re suddenly losing money on something you’re not interested in. It’s a double burden, and the path of least resistance is to move onto something else. If you’re passionate about the company to begin with—you love the mission, the product, the team, the science, whatever—the inevitable down times when you’re losing money or the company needs help are blunted by the fact that at least you feel like you’re part of something meaningful.
• It’s hard to wake up in the morning telling yourself you have no clue what the future holds, even if it’s true. Acting on investment forecasts is dangerous. But I get why people try to predict what will happen next year. It’s human nature. It’s reasonable.
• Stanford professor Scott Sagan once said something everyone who follows the economy or investment markets should hang on their wall: “Things that have never happened before happen all the time.”
• 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.
• Richard Feynman, the great physicist, once said, “Imagine how much harder physics would be if electrons had feelings.” Well, investors have feelings. Quite a few of them. That’s why it’s hard to predict what they’ll do next based solely on what they did in the past.

  Kyle: You’re not trying to predict the market you’re trying to predict what predictions people will make in trying to predict the market

• Two dangerous things happen when you rely too heavily on investment history as a guide to what’s going to happen next. 1. You’ll likely miss the outlier events that move the needle the most.
• 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.
• Nassim Taleb writes in his book Fooled By Randomness: In Pharaonic Egypt … scribes tracked the high-water mark of the Nile and used it as an estimate for a future worst-case scenario. The same can be seen in the Fukushima nuclear reactor, which experienced a catastrophic failure in 2011 when a tsunami struck. It had been built to withstand the worst past historical earthquake, with the builders not imagining much worse—and not thinking that the worst past event had to be a surprise, as it had no precedent. This is not a failure of analysis. It’s a failure of imagination. Realizing the future might not look anything like the past is a special kind of skill that is not generally looked highly upon by the financial forecasting community.
• That’s the correct lesson to learn from surprises: that the world is surprising.

  Kyle: Daniel Kahneman

• History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes that are relevant to today’s world.
• Or take venture capital. It barely existed 25 years ago. There are single venture capital funds today that are larger than the entire industry was a generation ago.40
• What this means, in effect, is that all historical data going back just a few decades about how startups are financed is out of date. What we know about investment cycles and startup failure rates is not a deep base of history to learn from, because the way companies are funded today is such a new historical paradigm.
• The Intelligent Investor is one of the greatest investing books of all time. But I don’t know a single investor who has done well implementing Graham’s published formulas. The book is full of wisdom—perhaps more than any other investment book ever published. But as a how-to guide, it’s questionable at best.
• Jason Zweig—who annotated a later version of Graham’s book—once wrote: Graham was constantly experimenting and retesting his assumptions and seeking out what works—not what worked yesterday but what works today. In each revised edition of The Intelligent Investor, Graham discarded the formulas he presented in the previous edition and replaced them with new ones, declaring, in a sense, that “those do not work anymore, or they do not work as well as they used to; these are the formulas that seem to work better now.”

  Kyle: Charles Darwin - kill your own ideas

• There’s a common phrase in investing, usually used mockingly, that “It’s different this time.” If you need to rebut someone who’s predicting the future won’t perfectly mirror the past, say, “Oh, so you think it’s different this time?” and drop the mic. It comes from investor John Templeton’s view that “The four most dangerous words in investing are, ‘it’s different this time.’”

  Kyle: The most dangerous 4 words < the 12 most dangerous words = “the four most dangerous words in investing are ‘it’s different this time.’”

• Michael Batnick put it: “The twelve most dangerous words in investing are, ‘The four most dangerous words in investing are, ‘it’s different this time.’”
• There is never a moment when you’re so right that you can bet every chip in front of you. The world isn’t that kind to anyone—not consistently, anyways. You have to give yourself room for error. You have to plan on your plan not going according to plan.
• Benjamin Graham is known for his concept of margin of safety. He wrote about it extensively and in mathematical detail. But my favorite summary of the theory came when he mentioned in an interview that “the purpose of the margin of safety is to render the forecast unnecessary.”
• Two things cause us to avoid room for error. One is the idea that somebody must know what the future holds, driven by the uncomfortable feeling that comes from admitting the opposite. The second is that you’re therefore doing yourself harm by not taking actions that fully exploit an accurate view of that future coming true.
• 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.
• Bill Gates understood this well. When Microsoft was a young company, he said he “came up with this incredibly conservative approach that I wanted to have enough money in the bank to pay a year’s worth of payroll even if we didn’t get any payments coming in.” Warren Buffett expressed a similar idea when he told Berkshire Hathaway shareholders in 2008: “I have pledged—to you, the rating agencies and myself—to always run Berkshire with more than ample cash … When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.”44
• Having a gap between what you can technically endure versus what’s emotionally possible is an overlooked version of room for error.
• Nassim Taleb says, “You can be risk loving and yet completely averse to ruin.”
• 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.
• The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.
• Only 27% of college grads have a job related to their major, according to the Federal Reserve.46 Twenty-nine percent of stay-at-home parents have a college degree.47 Few likely regret their education, of course. But we should acknowledge that a new parent in their 30s may think about life goals in a way their 18-year-old self making career goals would never imagine.
• 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.

  Kyle: Interest discovery

• 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.48
• Gilbert’s research shows people from age 18 to 68 underestimate how much they will change in the future.
• Regrets are especially painful when you abandon a previous plan and feel like you have to run in the other direction twice as fast to make up for lost time.
• 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.
• Jason Zweig, the Wall Street Journal investment columnist, worked with psychologist Daniel Kahneman on writing Kahneman’s book Thinking, Fast and Slow. Zweig once told a story about a personality quirk of Kahneman’s that served him well: “Nothing amazed me more about Danny than his ability to detonate what we had just done,” Zweig wrote. He and Kahneman could work endlessly on a chapter, but: The next thing you know, [Kahneman] sends a version so utterly transformed that it is unrecognizable: It begins differently, it ends differently, it incorporates anecdotes and evidence you never would have thought of, it draws on research that you’ve never heard of. “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.’”49

  Kyle: Charles Darwin - kill your ideas

• 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.
• Rightly so: those rewarded with dynastic wealth when times are good hold the burden of responsibility when the tide goes out.
• 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.”
• They want the returns without paying the price. The study focused on the mid-2010 through late 2011 period, when U.S. stock markets went wild on fears of a new recession and the S&P 500 declined more than 20%. This is the exact kind of environment the tactical funds are supposed to work in. It was their moment to shine. There were, by Morningstar’s count, 112 tactical mutual funds during this period. Only nine had better risk-adjusted returns than a simple 60/40 stock-bond fund. Less than a quarter of the tactical funds had smaller maximum drawdowns than the leave-it-alone index. Morningstar wrote: “With a few exceptions, [tactical funds] gained less, were more volatile, or were subject to just as much downside risk” as the hands-off fund.
• 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.
• 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.
• Investors often innocently take cues from other investors who are playing a different game than they are.
• 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.
• 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.
• The average mutual fund had 120% annual turnover in 1999, meaning they were, at most, thinking about the next eight months. So were the individual investors who bought those mutual funds. Maggie Mahar wrote in her book Bull!: By the mid-nineties, the press had replaced annual scorecards with reports that appeared every three months. The change spurred investors to chase performance, rushing to buy the funds at the top of the charts, just when they were most expensive.

  Kyle: 32% in 2020? - https://www.ici.org/system/files/2021-05/2021_factbook.pdf

• Data from Attom, a company that tracks real estate transactions, shows the number of houses in America that sold more than once in a 12-month period—they were flipped—rose fivefold during the bubble, from 20,000 in the first quarter of 2000 to over 100,000 in the first quarter of 2004.54 Flipping plunged after the bubble to less than 40,000 per quarter, where it’s roughly remained since.

  Kyle: Flipping declined 14% in 2020 - https://www.attomdata.com/news/most-recent/attom-data-solutions-2020-year-end-u-s-home-flipping-report/

• And short-term traders operate in an area where the rules governing long-term investing—particularly around valuation—are ignored, because they’re irrelevant to the game being played.

  Kyle: Short term returns allow for lower return thresholds. Is there a reason SaaS multiples can remain consistently elevated? If $1B entry price for $5M ARR remains the norm then consider the required return. $5 -> $25 (400% YoY) -> $75 (200% YoY) -> $150 (100% YoY) -> $300 (100%) -> $540 (80%) -> $891 (65%) At a typical 12x forward multiple in year 5 you have ~$750M revenue (85% of ARR) and a valuation of $9B. So there is still a 7x (granted, how many companies have grown at the above rate?)

• Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.
• 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. Rising prices persuade all investors in ways the best marketers envy. They are a drug that can turn value-conscious investors into dewy-eyed optimists, detached from their own reality by the actions of someone playing a different game than they are.
• 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.
• “For reasons I have never understood, people like to hear that the world is going to hell.”—Historian Deirdre McCloskey
• Pessimism isn’t just more common than optimism. It also sounds smarter. It’s intellectually captivating, and it’s paid more attention than optimism, which is often viewed as being oblivious to risk.
• It is fine to be pessimistic about the economy. It’s even OK to be apocalyptic. History is full of examples of countries experiencing not just recessions, but disintegrations. The interesting thing about Panarin-type stories is that their polar opposite—forecasts of outrageous optimism—are rarely taken as seriously as prophets of doom.
• Pessimism just sounds smarter and more plausible than optimism.
• Matt Ridley wrote in his book The Rational Optimist: A constant drumbeat of pessimism usually drowns out any triumphalist song … If you say the world has been getting better you may get away with being called naïve and insensitive. If you say the world is going to go on getting better, you are considered embarrassingly mad. If, on the other hand, you say catastrophe is imminent, you may expect a McArthur genius award or even the Nobel Peace Prize. In my own adult lifetime … the fashionable reasons for pessimism changed, but the pessimism was constant.
• “Every group of people I ask thinks the world is more frightening, more violent, and more hopeless—in short, more dramatic—than it really is,” Hans Rosling wrote in his book Factfulness.
• When you realize how much progress humans can make during a lifetime in everything from economic growth to medical breakthroughs to stock market gains to social equality, you would think optimism would gain more attention than pessimism.

  Kyle: Underestimate how much better the world is and overestimate how fine they’ll be individually (e.g high pessimism but low savings rates.)

• 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.
• Expecting things to be great means a best-case scenario that feels flat. Pessimism reduces expectations, narrowing the gap between possible outcomes and outcomes you feel great about.

  Kyle: Prepare for the worst and expect the best to come

• 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.

  Kyle: Connect to Sapiens - shared narrative

• This is different from, say, Germany in 1945, whose manufacturing base had been obliterated. Or Japan in the 2000s, whose working-age population was shrinking. That’s tangible economic damage. In 2009 we inflicted narrative damage on ourselves, and it was vicious. It’s one of the most potent economic forces that exists.
• But stories are, by far, the most powerful force in the economy. They are the fuel that can let the tangible parts of the economy work, or the brake that holds our capabilities back.

  Kyle: Connect to Packy McCormick - people want to be a part of a story

• 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.

  Kyle: Confirmation bias

• And there are so many financial opinions that once you pick a strategy or side, you become invested in them both financially and mentally. If you want a certain stock to rise 10-fold, that’s your tribe. If you think a certain economic policy will spark hyperinflation, that’s your side.

  Kyle: Connect to righteous mind

• Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.
• Daniel Kahneman once told me about the stories people tell themselves to make sense of the past. He said: Hindsight, the ability to explain the past, gives us the illusion that the world is understandable. It gives us the illusion that the world makes sense, even when it doesn’t make sense. That’s a big deal in producing mistakes in many fields.
• Part of the reason forecasting the stock market and the economy is so hard is because you are the only person in the world who thinks the world operates the way you do.
• 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.
• I have not met an investor who genuinely thinks market forecasts as a whole are accurate or useful. But there’s still tremendous demand for forecasts, in both the media and from financial advisors.
• 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 precision. It isn’t impacted by the vagaries of human behavior and emotions, like finance is.

  Kyle: Forecasting

• Kahneman once laid out the path these stories take: When planning we focus on what we want to do and can do, neglecting the plans and skills of others whose decisions might affect our outcomes. Both in explaining the past and in predicting the future, we focus on the causal role of skill and neglect the role of luck. We focus on what we know and neglect what we do not know, which makes us overly confident in our beliefs. He described how this impacts businesses: I have had several occasions to ask founders and participants in innovative start-ups a question: To what extent will the outcome of your effort depend on what you do in your firm? This is evidently an easy question; the answer comes quickly and it has never been less than 80%. Even when they are not sure they will succeed, these bold people think their fate is almost entirely in their own hands. They are surely wrong: the outcome of a start-up depends as much on the achievements of its competitors and on changes in the market as on its own efforts. However, entrepreneurs naturally focus on what they know best—their plans and actions and the most immediate threats and opportunities, such as the availability of funding. They know less about their competitors and therefore find it natural to imagine a future in which the competition plays little part.
• the foundation of, “does this help me sleep at night?” is the best universal guidepost for all financial decisions.
• Sandy Gottesman, a billionaire investor who founded the consulting group First Manhattan, is said to ask one question when interviewing candidates for his investment team: “What do you own, and why?”
• I love this question because it highlights what can often be a mile-wide gap between what makes sense—which is what people suggest you do—and what feels right to them—which is what they actually do.
• Charlie Munger once said “I did not intend to get rich. I just wanted to get independent.”
• Being able to wake up one morning and change what you’re doing, on your own terms, whenever you’re ready, seems like the grandmother of all financial goals. 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.
• Despite more than a decade of rising incomes—myself in finance, my wife in health care—we’ve more or less stayed at that lifestyle ever since. That’s pushed our savings rate continuously higher. Virtually every dollar of raise has accrued to savings—our “independence fund.”
• Independence is our top goal. A secondary benefit of maintaining a lifestyle below what you can afford is avoiding the psychological treadmill of keeping up with the Joneses.
• 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. Perhaps we just have a lower risk tolerance than others.
• 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.
• (The statistics show 85% of large-cap active managers didn’t beat the S&P 500 over the decade ending 2019.)71
• 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.
• We invest money from every paycheck into these index funds—a combination of U.S. and international stocks. There’s no set goal—it’s just whatever is leftover after we spend. We max out retirement accounts in the same funds, and contribute to our kids’ 529 college savings plans.
• And that’s about it. Effectively all of our net worth is a house, a checking account, and some Vanguard index funds.
• One of my deeply held investing beliefs is that there is little correlation between investment effort and investment results.
• My investing strategy doesn’t rely on picking the right sector, or timing the next recession. It relies on a high savings rate, patience, and optimism that the global economy will create value over the next several decades.
• If you fell asleep in 1945 and woke up in 2020 you would not recognize the world around you. The amount of economic growth that took place during that period is virtually unprecedented.
• What happened in America since the end of World War II is the story of the American consumer. It’s a story that helps explain why people think about money the way they do today.
• August, 1945. World War II ends.
• Low interest rates and the intentional birth of the American consumer.
• Pent-up demand for stuff fed by a credit boom and a hidden 1930s productivity boom led to an economic boom.
• Pent-up demand for stuff, and our newfound ability to make stuff, created the jobs that put returning GIs back to work. And they were good jobs, too. Mix that with consumer credit, and America’s capacity for spending exploded.
• Gains are shared more equally than ever before.
• Paul Graham wrote in 2016 about what something as simple as there only being three TV stations did to equalize culture: It’s difficult to imagine now, but every night tens of millions of families would sit down together in front of their TV set watching the same show, at the same time, as their next door neighbors. What happens now with the Super Bowl used to happen every night. We were literally in sync.75
• Debt rose tremendously. But so did incomes, so the impact wasn’t a big deal.
• Things start cracking.
• A combination of lucky economic advantages and a culture shared by the Greatest Generation—hardened by the Depression and anchored in systematic cooperation from the war—shifted when Baby Boomers began coming of age. A new generation that had a different view of what’s normal hit at the same time a lot of the economic tailwinds of the previous two decades ended.

  Kyle: Hard times make hard people. - find Rome meme

• Expectations always move slower than facts. And the economic facts of the years between the early 1970s through the early 2000s were that growth continued, but became more uneven, yet people’s expectations of how their lifestyle should compare to their peers did not change.

  Kyle: Institutionalized “keeping up with the Jones’”

• The boom resumes, but it’s different than before.
• We have built a new economy. His last sentence was important. It was a new economy. The biggest difference between the economy of the 1945–1973 period and that of the 1982–2000 period was that the same amount of growth found its way into totally different pockets.
• Joseph Stiglitz in 2011: While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone.
• The big stretch.
• A culture of equality and togetherness that came out of the 1950s–1970s innocently morphs into a Keeping Up With The Joneses effect.
• Peter’s parents believed—and instilled in him—that Americans’ lifestyles weren’t that different even if they had different jobs. His parents were right during their era, because incomes fell into a tight distribution. But that was then. Peter lives in a different world. But his expectations haven’t changed much from his parents’, even if the facts have.
• He can’t afford the stuff Joe can, but he’s pushed to stretch for the same lifestyle. It is a big stretch.
• Once a paradigm is in place it is very hard to turn it around.
• Success isn’t as meritocratic as it used to be and, when success is granted, it’s rewarded with higher gains than in previous eras.
• The Tea Party, Occupy Wall Street, Brexit, and Donald Trump each represents a group shouting, “Stop the ride, I want off.”
• Benedict Evans says, “The more the Internet exposes people to new points of view, the angrier people get that different views exist.”