THE PSYCHOLOGY OF MONEY by Morgan Housel | Core Message

[Music] i recently read the psychology of money by morgan housel having more money will make you happier if having more money means you have more control over your time billionaire charlie munger once said i did not intend to get rich i just wanted to get independent if you want to attain the kind of wealth which awards you the freedom to do what you want when you want with whom you want you must think differently about money and develop a strong investing psychology develop a strong investing psychology by understanding three concepts that most people fail to understand i call these the three money misunderstandings money misunderstanding number one compounding if i give you a dollar on january first and double it every day after that two dollars on january second four dollars on january third eight dollars on january fourth how much money would i have to give you on january 31st a thousand dollars ten thousand dollars well if you understand the power of compounding you know that you stand to make much much more than ten thousand dollars on january 31st by compounding one dollar at 100 for 31 days you would receive 1 billion 73 million 742 000 on january 31st congratulations you just become a billionaire in a month but if you delayed that game for a week and didn't start compounding that first dollar until january 8th how much would you receive on january 31st 250 million 100 million nope you would take home just eight million dollars on january 31st by waiting a week you brought home 99 less money if this doesn't seem intuitive don't worry the human mind does not easily grasp the power of compounding warren buffett is regarded as the best investor of all time today he's worth approximately 86 billion dollars but did you know that nearly 82 billion of his 86 billion was generated after his 65th birthday here's a chart of buffett's wealth over the years since buffett was 11 years old he has achieved an annual average return of 22 percent which is twice as good as the average stock market return but this 22 average annual return is nothing compared to other investors take jim simons a mathematician who runs the firm renaissance technologies simon's has achieved 66 returns for the last 33 years but simon's has just a quarter of the wealth that buffett has because simons like other investors have not consistently compounded their wealth for as long as buffett has buffett has more money than other investors because of one primary reason he's maximized his time in the market to leverage the power of compounding the first key to building independence level wealth is to start investing now with whatever you can afford may that be a hundred dollars or ten thousand dollars and keep that money invested so you give compounding enough time to work its magic this advice is simple but many smart investors fail to follow this advice because they get greedy many years ago charlie munger and warren buffett had another business partner named rick garan garen was an investing genius like monger and buffett but few people know bulgarian because when the stock market was soaring in the late 1960s garen leveraged his money and used debt to maximize his returns but when the stock market dropped by 70 percent in the early 1970s garen got margin calls and was forced to sell his stock whenever i'm tempted to take on risk and chase a big return in any given year i just remember that if i'm wrong and lose 50 in one year i'll need to achieve 100 return the following year just to break even now if greed doesn't interrupt your compounding curve fear probably will when you watch your stock market portfolio drop by 30 in a market downturn fear will likely consume you and make you believe that you're going to lose all your money so you better sell and wait for the market to recover but know this in any 20-year period 100 of people who bought and held the s p 500 stock market index made money we all must develop the mental fortitude to weather short-term downturns in order to benefit from long-term uptrends and leverage the power of compounding to do this we must correct the second money misunderstanding money misunderstanding number two volatility volatility refers to the daily swings in the market stocks have high volatility because on any given day a stock portfolio can be up or down a few percent people who can't handle the emotional ups and downs of the stock market or other volatile markets invest in low volatility assets like treasury bonds and guaranteed investment contracts to achieve a steady return but no low volatility asset will outperform a volatile stock market over an extended period some investors believe that they can get high annual returns without volatility that's why several people happily gave millions of dollars to a man on wall street who claimed he could generate a steady 1 return each month with no downside risk that man was bernie madoff a con man who ran a ponzi scheme and took everyone's money volatility is the emotional price you need to pay if you want good annual returns if you're invested in an index like the s p 500 which constantly adds growing companies to replace dying companies you can be confident that the long-term trajectory of that index is up and to the right regardless of how much volatility the index experiences in any given month or year but when you log into your trading account and you're down a bunch of money for the day or month it's hard not to believe that you've done something wrong author morgan housel offers a great analogy to help you ride out the market dips and embrace volatility household suggests viewing volatility as a fee not a fine if you get a fine like a parking fine for parking in an illegal spot you change your behavior and avoid that spot in the future but if that parking spot required a fee up front you would pay it and continue parking there if that spot was the best spot for miles the same principle applies to investing if you own an index like the s p 500 view the volatility and the occasional dip as a fee for being in the market and getting the opportunity to receive high annual returns over an extended period of time money misunderstanding number three tail investments when amazon launched the fire phone in 2014 it could very well have been a dominant smartphone and doubled amazon's stock price but the fire phone was a dud and just a few years after the fire phone was launched ceo jeff bezos had to scrap the project and swallow 170 million loss but bazel's was unfazed in an interview after the fire from failure he said if you think that's a big failure we're working on much bigger failures right now i'm not kidding some of them are going to make the fire phone look like a tiny little blip bezos made hundreds of small bets at amazon one of those bets was amazon web services a small side project that now generates over 60 percent of amazon's operating income amazon web services is a tail investment a single investment that massively outperformed all other investments and made up for several bad investments like the fire phone since it's impossible to know which investments will generate huge returns and which will not it's wise to spread out your bets instead of going all in on one investment make at least 10 equal investments in a diversified group of companies currencies commodities or other assets you think could double in the next five years or invest in a big broad index of companies like the russell 3000 since 1980 nearly 50 of companies in the russell 3000 have lost value but the index has provided a 73-fold return thanks to just seven percent of companies in the index like apple and amazon who have done extraordinarily well as author morgan hussell likes to say you can be wrong half the time and still make a fortune in the end strengthen your investing psychology by constantly reminding yourself to leverage the power of compounding embrace volatility and make many diversified investments to benefit from a few tail investments remember buffett's compounding curve and invest right now to make time your biggest competitive advantage remember that volatility is a fee and not a fine and remember that you can have several failed investments like the fire phone so long as you have one or two wildly successful investments like aws that was the core message that i gathered from the psychology of money by morgan housel this is one of the best books i've read for months and a must read for any aspiring investor i highly recommend it if you would like a one-page pdf summary of insights that i gathered from this book just click the link below and i'd be happy to email it to you if you already subscribed to the free productivity game email newsletter this pdf is sitting in your inbox if you like this video hit that like button and share it with a friend and as always thanks for watching and have yourself a productive week

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Id: yNMnjMgdIWw

Length: 9min 49sec (589 seconds)

Published: Mon Feb 22 2021