Main Points

Another fluff book, very anecdotal. Of course, this time, and unlike The Little Book of Common-Sense Investing, the author acknowledges it. I’ll just compile the main points in a set:

1. Finance — spending habits, valuations, risk-reward calculations, and so on — is mostly an environment-influenced thing. Not just the current environment either; the environments people grew up in will continue to affect their financial decisions. People who grew up in high-inflation environments, slums, and misery will obviously spend (and understand) money differently than those who didn’t. No one is ‘crazy’ with their money — they just know, or fear, something you don’t.
2. Luck — and its flip-end risk — is an unacknowledged, and yet major, factor in determining financial success. People ignore luck because attributing someones’ financial success to luck, as opposed to hard-work or talent, is rude and jealous behavior. The successful, however, do not shy away from admitting the influence of this wildcard in their success. For instance: Bill Gates was one of the few high school students in the world to have access to a computer. He acknowledged the role of this computer in his success, and his luck in having access to it. The flip-end of luck — risk — also plays a major part in determining failure.
   1. Be careful in who you praise and admire, and who you look down upon and disdain. It is impossible to quantify the role luck and risk had in their success and failure.
   2. Focus less on individuals and case studies, and more on broad patterns.
3. A famous anecdote goes: Joseph Heller (author of Catch-22) was at a billionaires’ party. Kurt Vonnegut, also in attendance, informed him that the host earns more in a day than Joseph earned from the sales of Catch-22. Joseph’s reponse? “Yes, but I have something he’ll never have: enough”. There are a million stories of millionaires and billionaires who lost all they had, because they kept dreaming for more. The root cause is envy — even the richest man in the world probably envies somebody, and he might even bet all his wealth on overtaking that somebody. Hell, you could say that wealth is a selection process that amplifies this trait. Be like Joseph, since it’s better to hold onto even the littlest amount, than lose everything in a gamble. Therefore:
   1. The hardest financial skill is getting the goalpost to stop moving.
   2. Social comparison is the root of all ills in this regard.
   3. Enough is not too little.
   4. There are many things not worth risking, no matter the potential gains.
4. Generic chapter on compounding
5. The Wall Street crash of ‘29 was disastrous for many peoples’ livelihoods. There are stories aplenty of people committing suicide in the aftermath, even millionaires. However, there were also a lucky few that made boatloads of money by shorting the market. What did the former group lack that the latter had? Paranoia and humility. After all, making money is easy — keeping it is the hard part. Therefore:
   1. Rather than quantity of money, what you should desire is security of money. A $1 billion that may be disappear on a random day, with the roll of a dice, or a $100 million that will never be lost no matter what?
   2. Planning is important, even though plans almost always fail. Incorporate the failure of plans — hedge your risks, play both sides, secure an exit strategy — and you will be near unbeatable.
6. Disney ran losses for most of its early existence. Basically every animated movie it produced cost a fortune, and despite immense popularity, it faced quite a bit of financial trouble. When Walt Disney (the company’s namesake, and founder) wanted to produce Snow White — at massive costs — most predicted the company would finally go bankrupt. It did not, and in fact, Snow White became the highest grossing animated film of all time up to then, earning (in modern terms) hundreds of millions of dollars and completely ending the company’s financial troubles. The tail event of Snow White, one film out of more than 400 (mostly unprofitable) cartoons in Disney’s repertoire, made the company what it is today. Therefore:
   1. The majority of your returns — in investing, or whatever else — are driven by a few successes. You could lose most of the time, but one success can completely reverse your misfourtune and then some. These tail events are a chance success worth assuming risk for.
7. America is the richest country in human history today. Even Americans from a hundred-years ago would be in awe at its prosperity, let alone the mediaeval peasant. And yet, Americans are more stressed, and more worried, than most people around the world. Psychologist Angus Campbell, in his 1981 book ‘The Sense of Wellbeing in America’, offered a simple explanation: control. What people desire most is control over their lives. Lack of it makes you unhappy, and vice versa. Americans have sacrificed this control for money. The rise of ‘knowledge workers’ — people who use their brains to work, rather than manual labor — has increased this misery. The factory worker isn’t thinking of his work outside of the conveyor belt. After all, there’s not much point in doing so. If you’re a programmer or a manager, though, you might be thinking of your current project constantly. Really, you’re at work 24/7. You have even less control of your life.
8. We want wealth and indulge in conspicuous consumption because we think it earns us the admiration of others. For instance, you may want a cool car for this reason. The reality is that bystanders, yourself included, rarely think ’the guy driving this car is so cool!’ — instead, they admire the car and desire it for themselves. Why? So they can also be admired by others. This is the ‘man-in-the-car paradox’.
9. Wealth is the accumulation of a stock of assets, in dry financial terms. However, the popular consciousness views wealth as private jets, luxury cars, and fine dining (among other things). The reality is that, the more you indulge in these luxuries, the less wealthier you actually become. If I blew all my savings on a fancy car, am I richer than the guy who didn’t? Obviously not, it’s the other way around. And so, wealth is what’s not shown. If you want to be wealthy, if nothing else, you need to not spend money.
10. You don’t need massive salaries, or lucky investments, to get wealthy. There are two simple ideas you need instead: the first is to save as much as you can; the second is to live frugally and lower your standards. The first is simple: save as much as possible, invest it, and repeat every month. It’s the fastest, safest, and most tried way for a commoner like you or me to accumulate wealth. The second is also simple: your wealth has an effective value besides its actual (lets say $) value, and that is your use for it. If you gave a rich kid and a middle-class kid $1000 to spend, the middle-class kid would likely come out of it far more satisfied. He has lower standards, after all.
11. You might not know: fevers are actually good for your body. They are your body booting up its anti-virus. And yet, most patients and doctors seek to eliminate them — even if the science says they’re good for you. Why? Because they’re painful. Nothing wrong with that. Another thing you might not know: a pair of researchers from Yale found that, on paper, young savers who used 2:1 margins in their retirement accounts would have 90% greater retirement wealth. Even if, one day, you lost everything, so long as you continued following the plan, you’d be fine. The data supports this idea. But nobody will follow this plan — who’d want to see all their savings wiped out in one day? Nothing wrong with that, either. When making financial decisions, it’s fine to be less than rational — just stay reasonable. If it helps you sleep better at night.
12. History is not a good guide to the future. Especially in investing, which is a field dominated by innovation and change. This is made more true by how tail events have, and will continue to, influence markets and the world alike more than the sort of historical patterns you can pick up on.
13. There is never a time when it is good or right to bet everything you have on a decision. It doesn’t matter how confident you are. You must leave room for error, and include error into your planning. Benjamin Graham once said that the point of a margin of safety is to render the forecast ‘unnecessary’. Meaning, even if you lose out, you’ll still live to fight another day.
14. The End of History Illusion — more of a delusion really — explains a common human behavior. We tend to believe that we have experienced all the growth we are ever going to experience, and will not mature further. Then, a little while later, we find out how wrong we were! And yet, we fall under the illusion again and again. Any financial planning you’re doing has to have an end goal and the method to achieve it — do you want to sacrifice your youth for a comfy retirement, or the other way around? But, whichever decision we make, there is a good chance that we will come to regret it. Why? Because we humans constantly change, even if we don’t think we will — as The End of History Illusion showcases. If our desires change, then the plans we made for our out-of-date desires will saddle us with regrets. In cases like these, you have to do two things: moderate your planning at all times, so that you can still be satisfied when your desires change; quickly shift your plans to cater to your new desires, and ignore any ‘sunk costs’.
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16. Market prices do not capture everything about a commodity or a stock, and mean different things to different people. In 1999, Cisco stock rose 300% to $60 per share. But this was largely on the back of speculative activity, with day-traders leading the way. If you were a day-trader looking to buy in the morning and sell by night, the price didn’t matter — it just needed to go up, was all. If you were a long-term investor, on the other hand, looking at the next 10-years… that price would mean quite a different thing.