Have you heard the story about Ronald Read, the janitor that had 8 million dollars
in savings when he died in 2014? Yes, you heard that right.
Janitor. $8 millions. And he didn´t win the lottery
or inherit the money either. He just saved consistently
throughout his life, while letting the wonders of
compounding do its thing. The moral is that your behavior with money is
oftentimes more important than how intelligent you are. Even if you don´t have a diploma
from Harvard, or work on Wall Street, you can become rich by just
behaving in a sound way. As Morgan Housel puts it: “Financial success is not a hard science. It’s a soft skill, where how you behave is more
important than what you know.” Spend your next ten to fifteen minutes on this video,
and you might excel on the soft skill of investing! This is a top 5 takeaways summary of
The Psychology of Money, by Morgan Housel. And this is the Swedish Investor, bringing you the best tips and tools for reaching
financial freedom through stock market investing. Takeaway number 1: Pay the price Let´s say you want
a new, nice, watch. You go to the store to
check out the offerings. You are really after something
that will impress your friends and the lovely lady you are dating. You now have a choice: either pay for the watch,
or steal it and run because you have done your cardio, right? My guess is that you would
choose option number one - no matter your physical capacity. You would take out your card and
swipe that thing; do the right thing. The point is that you know that having
a new watch comes with a price, a fee. And it's just the same with investing;
it comes with a price too. Throughout the videos on this channel, there are some reoccurring
takeaways for high returns; one of them being a somewhat
concentrated portfolio with Peter Lynch perhaps
being the exception. The concentrated portfolio brings with
it a characteristic to your performance; it will be volatile. This is the price, the fee, for having high returns
in the stock market over the long-term. If you don't have the stomach to stay the course when your
net worth decreases by, say, 20% during a single week, as two of your major holdings report quarterly
earnings below what analysts expected, don't aim to maximize your returns; because the higher the returns,
the higher this fee typically is. Let´s say you already 10 years ago
could visualize Netflix’ bright future. You invested a large portion of
your net worth in the stock. Well, then you would be quite
a rich person today! However, could you afford paying
the price for this journey? Netflix has, during this period,
had many major downturns. Would you have sat still in that boat during
2011 when Netflix lost tons of customers, and the stock price fell 80% from its peak
during the ensuing months? Your portfolio returns
would look terrible. What would you tell your
spouse and your kids? Could you stomach facing them knowing that
you might just have endangered their future? Would you still think that being
almost all-in Netflix is a good idea? This is of course an extreme example, but even if you have something less extreme
than an all-in Netflix approach to investing, you’ll have to pay the price of
volatility nonetheless. Let’s say that you bought
an S&P 500 index fund in 1980. You’d still have to face about 13 years combined when
your investment portfolio was down 20% from its high. And about 8 months when
it was down 50%. That’s tough! Stock-market investing is a great thing, that
enables wealth creation like few other options. But don´t try to fool yourself
– it doesn´t come for free. All investors will experience volatility; and you have to look at it as the price
you pay for a brighter future. Takeaway number 2: Never Enough It’s a very interesting phenomenon that you can hand somebody a $2 million bonus,
and they’re fine until they find out that the person next to them got 2-million-1,
and then they’re sick for the next year. Capitalism is great at doing two things: generating wealth and generating envy. The urge to surpass your
neighbours, peers, and friends, can help energize your hard work
and strive to really "make it". And of course, being motivated into becoming more
productive and doing meaningful work is a good thing, but social comparison can also
cause us to feel like we’re never enough. Let’s look at some statistics. To belong to the top 1% highest
income earners in the US, you’d have to earn somewhere
around $500,000 a year. That’s what a highly specialized doctor,
let’s call him Bill, earns, and by almost any standard,
Bill would be considered rich. He can afford to drive nice cars, go on
long vacations to exotic countries, perhaps hire someone to do work
which he thinks is tedious, etc. Bill has been feeling about himself and what he has achieved
financially in his life. Well, that was until he bought
a vacation home in the Hamptons and realized that he had
Stan as his neighbour. Stan belongs to the top 1% of the 1%. He is a CEO of a quite large public company,
and earns a staggering $10 million per year. Now, you’d hope that at least Stan would be satisfied
with his financial achievements, but nope! This guy was a childhood
friend of Michael Jordan, and this all-time great basketball player is someone
who belongs to the 1% of the 1% of the 1%. And well, compared to Michael’s
fortune of about $2b, Stan’s yearly salary of $10m
suddenly seems like peanuts. Does it end here? Well no, it doesn’t. Because Michael occasionally attends parties with
celebrities where a guy named Jeff Bezos shows up. Bezos is in the top 1% of the
1% of the 1% of the 1% and he increased his net worth by about $75b
in 2020, now sitting at something like $200b. There’s always a bigger fish. The type of envy which has emerged
from comparisons of this kind has caused a lot of people to do
foolish things throughout history. Some have leveraged their portfolios to the teeth
in order to move up to a higher pyramid, just to lose it all and
then commit suicide. Some have acted on insider information
and lost both their personal reputation and then later their freedom
when they’ve gone to jail. Many have forsaken their families and then had their partners leaving them or
cheating on them (or both) as a result. By watching this channel and learning on
how to become a successful investor; chances are that you will at some point
reach a level of financial freedom that the average Joe can only dream about. But you need to, at some point,
accept that enough is enough. We will not trade something that we have and need
for something that we don’t have and don’t need, even if we’d kind of like to have it. Takeaway number 3: Crazy is in
the eye of the beholder At a first glance, it seems like a lot of people
do crazy things with their money. Some spend it in ridiculous
amounts on ridiculous items, and others hide it under their mattresses. But the thing to remember is that people come from
different backgrounds with different childhoods, different parents, different life experiences
and different educations. All this adds up to different
perspectives and values. What seems crazy to you might
make total sense for me. Morgan uses the example of
lottery tickets in the book: the lowest income households in the US spend
more than 400 dollars per year on the lottery. This is 4 times more than the average
in the highest income group. Combine this with the fact that
more than a third of Americans cannot come up with
400 dollars for an emergency. Do these people spend their
emergency buffer on lottery tickets? Seems crazy, doesn´t it? But again; we don´t have the same
perspective as individuals. Try to see it from their perspective; they live paycheck to paycheck,
with little room to save money, they often lack education and
thus a nice career trajectory they can´t afford a nice
vacation or a new car, and they can´t put their children through
college without a mountain of debt. Buying a lottery ticket is their way of buying
into the dream that many of us already live. That is why they buy more
lottery tickets than we do. Not so crazy after all perhaps? So, how does this make you
a better investor? For one thing, by acknowledging
that we are different, we become less tempted to copying
an investment portfolio or strategy which doesn’t suit our own goals. For example, our own risk-profile
might be higher than a billionaire, as our own focus is more on
the “getting rich part”, and not so much about “staying rich”. Copying the billionaire’s portfolio might be
suboptimal for your goals. Acknowledging differences can also help us
to say no more easily to investments that are outside our own
circle of competence. Take Gamestop for example. As I am not a trader, I didn’t
participate in this drama at all. It is simply not my card to play. Understanding different
peoples’ perspectives, or at least that there are different
lenses to see the world through, will help you make better
sense of our society and lead you on the path that is yours. Takeaway number 4: Peek-a-boo What does the Great Depression,
World War II, the financial crises and
Covid-19 all have in common? They were all events which
shaped our society, they had huge impacts on
the financial markets, and they were pretty much
impossible to foresee. Nassim Taleb, who is one of
my favourite authors, would refer to these
event as Black Swans. The definition of a Black Swan is that: 1. It’s an outlier. Nothing that has happened before can convincingly
point to even the possibility of the event. 2. It carries an extreme impact. 3. It becomes explainable after the fact. Human nature fools us into believing that we should
have been able to know it would happen all along. Imagine it is Black Monday 1987. How would you have reacted to the market loosing
almost one fourth of its value in one day? Would you have been one of the individuals
that shouted: “SELL! SELL!” or would you have been able
to weather the storm, perhaps putting in additional chips
which you’ve kept on the side-lines? Here’s an interesting fact: If you invested in the S&P 500
index 20 years ago, but you missed out on the 4 best
performing stock market days, you’d have a 164% return
instead of 291%. That’s quite a big difference. The moral of this takeaway is that
it is more useful to prepare yourself, both mentally and financially, for a disaster which you cannot foresee than hoping
that you’re able to react before everyone else. Stop listening to macro projections, the things that will cause big fear among
the investment community in the future are the things that are unlikely
to be foreseen anyways. Takeaway number 5: The seduction of pessimism If I were to give you a bunch of reasons to why
the market will crash later this year, mentioning the gigantic
US governmental debt, that stimulus checks may lead to
the return of inflation, and perhaps something about
new strains of Covid-19; you would most likely be intrigued, and perhaps end up with quite a negative view of where
in the market cycle that we are at the moment. Were I instead to give you examples of why
things probably will continue to get better, by showing how life expectancy is rising, how sustainable energy is getting cheaper or how computing power is exploding, you would most likely just shrug your
shoulders and not think twice about it. We all know that the pessimistic person
sounds so very intelligent, and the optimist sounds
naïve in comparison; why is that? Daniel Kahneman, the author of
Thinking Fast and Slow, says asymmetry towards loss and listening to
pessimists is an evolutionary trait; “When directly compared or weighted against
each other, losses loom larger than gains. Organisms that treat threats as
more urgent than opportunities have a better chance to
survive and reproduce.” We tend to listen to pessimists more carefully,
not only for evolutionary reasons, but also because progress happens
much slower than setbacks do. Progress rarely happens overnight,
but setbacks often does. Because tragedies and setbacks happen
during much shorter time-periods, its much easier to create an intriguing
and persuading story around it, and thus it receives more attention. To create an optimistic story
about the future, we must look at longer time-horizons. This often becomes more
vague and less dramatic. Knowing that you will perhaps be
more fascinated by a pessimist, and less so by an optimist, can perhaps help you becoming less
asymmetric towards it in the future. The world is better than you think, as Sweden’s Hans Rosling would have said. So. you are not going to get rich in the stock
market without paying the price of volatility - Envy is the worst of the seven deadly sins. Never risk what you have and need for
what you don’t have and don’t need. - Different perspectives cause different courses of
actions to be reasonable or rational - Instead of trying to foresee disasters prepare yourself
mentally and financially so that you can survive them; and - Be careful when taking investment advice. Understand that pessimism appeals more to
your survival instincts than optimism does. That was it for today – but that was
not it from Morgan Housel. Check out the book, it’s a real gem! Here’s a suggestion on
what you can watch next if you want to understand more about the human
psychology and its relation to money. Cheers!
