Money. Some have it. Some Don’t. Some have mastered it. Most are still chasing it. You may think of money as just numbers, and
spreadsheets and math. Or An equation that needs to be solved. But The real financial decisions are made
away far from calculators, around dinner tables - with ego, pride, fear and personal history. The true nature of money is the dance between
the cold arithmetic of a spreadsheet and human nature. When it comes to money we are complicated
creatures and financial success is not so much about how much you know but how you behave. This video was inspired by Morgan Housel’s
amazing book “ The Psychology of Money” Let’s delve into the strange and human side
of money. Financial DNA We all come from different generations, with
parents earning different incomes and holding different values, living in various parts
of the world, born into different economic environments with varying incentives and varying
opportunities, we all have very different experiences towards money. Take for example the stock market and inflation. People born in 1970 saw an almost tenfold
increase in the S&P 500 during their teens and 20s, leading most to have a positive view
of the stock market and a higher inclination to invest. People born in 1950 saw the stock market go
nowhere in their teens and 20s, leading to a more negative view of the stock market and
less inclination to invest. People born in the 1960s experienced significant
inflation during their teens and 20s, leading to a higher awareness and more negative view
of inflation and its effects. People born in 1990 experienced relatively
low inflation during their lifetime, leading to less concern and awareness of its effects. A person's experience with the stock market
and inflation during their formative years greatly shapes their attitudes and behavior
towards investing and financial decision-making. People justify every financial decision they
make based on the information they have at that moment and their mental model of the
world, which has been passed onto them from their parents and is shaped by their unique
life experiences. Although they can be misinformed, lack information
or make bad decisions, their actions make sense to them in that moment and align with
their own personal story. According to Housel, “People do some crazy
things with money. But no one is crazy.” We all have unique worldviews and since there
is no universally correct way to manage money successfully, none of us are crazy. WE MAKE FINANCIAL DECISIONS BASED ON OUR PERSONAL
LIFE EXPERIENCES AND OUR WORLDVIEW. Compound Kings There is no doubt that Warren Buffett is considered
one of the greatest investors of all time. What is staggering is that $81.5 billion of
Warren Buffet's $84.5 billion net worth was earned after he reached his mid-sixties. Housel explains that “few pay enough attention
to the simplest fact: Buffett’s fortune isn’t due to just being a good investor,
but being a good investor since he was literally a child.” As a result of investing from the early age
of 10, Buffet was able to harness the power of compounding. Let's say you invest $1,000 at an interest
rate of 8%. Your initial investment would earn you $80
after one year. If you compounded your total of $1080 at 8%
interest the next year, you would now earn $86.4 You've earned money on your initial investment
as well as the interest you earned on the principal. An investment compounded over time gains interest
not only from the original investment but also from the interest generated on top of
the original investment. The counterintuitive nature of compounding
makes many of us not realize how extreme the results can be. Compounding, however, can help you earn more
money over time. Warren Buffett began serious investing at
age 10 and had a net worth of $1 million by age 30. Let’s imagine an alternate reality where
Warren Buffet behaved more like most young men in their 20’s and used a lot of his
early income on traveling and a few nice cars. If he started with a net worth of $25,000
at age 30 and retired at 60, but continued to generate the amazing average returns of
22% annually - his net worth today would be around $11.9 million (99.9% less than his
actual net worth today of $84.5 billion). Warren Buffett's financial success can be
attributed to the financial base he built in his early years and his longevity in investing. His skill is investing, but his secret to
success is time and the power of compounding. Consider this from another perspective. The richest investor of all time is Warren
Buffett. However In terms of average returns, he is
not the greatest. Jim Simons, for instance, is a hedge fund
manager who has compounded money at a staggering 66% annually since 1988. A much higher rate than Buffet. The net worth of Simons however is 21 billion
- which is 75% less than Buffett's. How is this possible? According to Housel, the reason for this is
that Simons wasn't able to find his stride in investing until he was 50 years old. Effectively giving him less than half as many
years to compound as Buffett. Housel estimates that if he had invested over
a time frame as long as Buffett, his net worth today would be….. “sixty-three quintillion nine hundred quadrillion
seven hundred and eighty-one trillion seven hundred eighty billion seven hundred and forty-eight
million one hundred sixty thousand dollars.” ($63,900,781,780,748,160,000) It's important not to underestimate the power
of compounding. No matter how counterintuitive the results
of compounding may seem, they should never be ignored. Pessimism and money. Optimism is a belief that the odds of a good
outcome are in your favor over time, even if there are setbacks along the way, but when
it comes to money, we all have a bias toward pessimism that we hold dear in our hearts. Looking back however, things have generally
improved over the years. So what is it about pessimism that we are
inclined to embrace rather than optimism? The answer is because GOOD THINGS TAKE TIME
and don’t happen overnight. Money is a subject that attracts pessimism
for a variety of reasons. Let's start with the fact that money matters
to all of us. When we hear about something bad happening
in the economy, we're more likely to pay attention. For example, a 40% decline in the stock market
over six months is likely to attract attention immediately and may even attract government
intervention. However The incremental nature of a 140% gain
over six years can go largely unnoticed. Every year, half a million American lives
are saved by the progress of medicine over the last 50 years. Slow progress, however, attracts less attention
than quick, sudden losses such as terrorism, plane crashes, and natural disasters. There are many overnight tragedies, but few
overnight miracles. To be practical, we don't have to be pessimistic. Despite setbacks, we can hold onto the belief
that over time, the odds of a positive outcome are in our favor. When watching the news highlighting a stock
market crash, economic woes, or other money problems - try to remember that things tend
to improve over time. Two Forgotten Elements. In 1968, there were roughly 300 million high-school-age
people in the world, and of those 300 million, 300 students attended a small school in Seattle
called Lakeside. Lakeside happened to be the only high school
in the world at the time that had a professor with the foresight to lease a computer, the
Teletype Model 30. This was no ordinary computer, it was advanced
for the time and the type of computer that even Graduate students didn’t have access
to. And for one lucky student at Lakeside this
would change everything. That student was Bill Gates. From 300 million to 300. In 1968 there was roughly a one in a million
chance of being a high school student with access to a computer. Bill Gates and his school mate Paul Allen,
would go on to create Microsoft together. Even as a teenager, Gates showed exceptional
intelligence, hard work, and a vision for computers unlike anyone else. But going to Lakeside also gave him a one-in-a-million
competitive advantage and head start. And Gates is not shy about this, in 2005 he
said “If there had been no Lakeside, there would have been no Microsoft,” What is not often mentioned in the early Microsoft
story was a third member of this gang of high-school computer prodigies. Kent Evans. Just as intelligent, just as visionary. Kent could very well have been one of the
founders of Microsoft, Alongside Gates and Allen. However, that would never happen. A mountaineering accident took Kent's life
before he graduated high school. The odds of a high school student being killed
in a mountaineering accident are around one in a million. Just as the extremely rare stroke of luck
would propel Bill Gates and Paul Allen to great success. Kent Evans would experience an extremely rare
event and an encounter with what housel calls the close sibling of luck, risk. Luck and risk are like the wind and the waves
that determine the course of a sailboat. The sailor can control the rudder and the
sails, but ultimately the direction and speed of the boat are influenced by external factors
that cannot be fully predicted or controlled. The pursuit of success is full of twists and
turns, and the role luck and risk play in shaping our lives is an important perspective
to keep in mind. Understanding that Success is a complex combination
of factors, including both talent and luck can help us approach our own financial decisions
with greater humility and perspective. The Key to Happiness. People want to become wealthier to make themselves
happier, but according to Housel “ the key to happiness is the ability to do what you
want, when you want, with who you want, for as long as you want” The pursuit of material wealth has led to
many people working harder and giving up more control over their time, despite being richer
than ever before. However, studies show that having control
over your life is the most dependable predictor of positive feelings of wellbeing, more than
your salary, house size, or career prestige. Ultimately, controlling your time is the highest
dividend money pays. Pursuing money without valuing time is like
filling a bucket with a hole in it. No matter how much water you pour in, it will
continue to leak out. Similarly, no matter how much money you accumulate,
it won't bring lasting happiness if you don't have control over your time and can't enjoy
the fruits of your labor. Tail Events Heinz Berggruen, a man who fled Nazi Germany
and settled in America, became one of the most successful art dealers of all time. He collected a massive amount of art, including
works by famous artists like Picasso, Klee and Matisse. In 2000, he sold part of his collection for
over 100 million euros. What was his secret to acquiring so many masterpieces? Was it skill, Was it luck? According to Horizon, a Research firm, great
investors buy vast quantities of art and hold onto them for a long period of time. They wait for a few of those paintings to
become well known and worth a lot of money, even though most of the paintings they bought
were not worth very much. In other words, it's not about being right
all the time, but having a diversified portfolio and waiting for a few winners to emerge. Perhaps 99% of the works someone like Berggruen
acquired in his life turned out to be of little value. He could be wrong most of the time, But that
doesn’t particularly matter if the other 1% turn out to be the work of someone like
Picasso. These events are known as long tails. When a small number of events can account
for the majority of outcomes. The long tails of Berggruen's art collection
are what led to his ultimate fortune. The story of Berggruen teaches us a valuable
lesson about investing and this long tail concept also applies to many aspects of business
and investing. The obvious example is Venture Capital. Most of the startups in a VC fund will fail
and lose money for the fund, but all they need are a few outlier startups which make
20x + returns to make up for losses. ____________________ Take Amazon, for instance. In 2018, it drove 6% of the return on the
S&P 500 even though it is just one company. If we look inside Amazon. Its growth was largely driven by two tail
events: Amazon Prime and Amazon Web Services. These two products alone more than made up
for all of Amazon’s less successful experiments, such as the Fire Phone or travel agencies. After the disastrous release of the Amazon
Fire phone, rather than apologizing to shareholders, Jeff Bezos said: “If you think that’s a big failure, we’re
working on much bigger failures right now. I am not kidding. Some of them are going to make the Fire Phone
look like a tiny little blip” Bezos understands that it is OK to make mistakes
and fail with most products if the process creates the 1% of Tail event products that
drive everything. Tail events are mostly unintuitive and hidden
from us because we only see the finished products and not all the failures along the way that
led to that finished product. Housel in the book uses a real life example
of a stand up comedian. When you are watching the Netflix special
you are saying to yourself, Wow this comedian is amazing. What you aren't seeing are all the trial and
error failed jokes that the comedian tried out in small clubs all around the country
before doing the special. The Netflix special is the 1% compendium of
all the tail event jokes that actually made people laugh. 99% of the jokes along the way were probably
just OK. When it comes to investing Even though long
tails are prevalent, most of us ignore them. When things go wrong, we tend to overreact. As soon as you accept that tails drive everything
in business, investing, and finance, you realize lots of things may go wrong, fail or fall
apart. Remember: Out of the nearly 500 stocks Warren Buffet
has picked, only 10 have made the majority of his money. Good Stock pickers will only be right half
of the time. Good leaders will only make good decisions
half of the time. The fact that you might be wrong sometimes
doesn't mean that things won't work out over time. In the end, the outcome can be determined
by only a small number of events. True Wealth VS Being Rich It's so important to understand the difference
between being rich and being wealthy.Richness is about your current income and the things
you own, while wealth is about the financial assets you have yet to spend. True wealth isn't what you see, but what you
don't. It's easy to assume that someone driving a
Lambhorghini is wealthy, but appearances can be deceiving. In reality, many individuals are living beyond
their means and relying on debt to fund their flashy lifestyles. Wealth isn't about the cars you drive, the
diamond rings or the homes you own; it's about those financial assets that you have yet to
spend. Accumulating wealth takes self-control and
restraint. The diamonds, watches, and first-class upgrades
that you decline all contribute to your overall wealth. It's easy to find rich role models who spend
lavishly, but true wealth is hidden and therefore harder to imitate. We're conditioned to believe that having money
means spending money, but the real key to building wealth is to save and invest the
money you have. In fact, the only way to be wealthy is to
not spend the money that you do have. The next time you see someone driving a fancy
car or living in a big house, remember that you can't judge wealth by appearances alone. The true key to wealth is self-control, restraint,
building assets and investing in your future. The Real Price Imagine you are climbing a mountain with the
goal of reaching the peak and admiring the amazing view. Maybe you will get sunshine that day, maybe
rain. You may get lost, you might fall and injure
yourself….The difficulty of the climb is not always apparent until you're in the thick
of it. From the ground looking up the path to take
may seem obvious, but along the way you will certainly need to reassess and change your
path to the peak. You are under no illusion however that there
will be some golden escalator that will safely take you to the peak. You understand before the climb that this
uncertainty and risk is just the price you have to pay to get to the top. But when it comes to investing in the stock
market, many people think they can avoid the uncertainty and risk and get something for
nothing. Housel likens the stock market to getting
a new car. If you want to get a car, you have three options. You can buy a new car, buy a used one, or
steal one. The new car is a higher price, but the reward
is greater. Think of the new car like aiming for 12% returns
from the stock market. The used car is cheaper, but also comes with
less reward. The used car is like a much safer investment
but only returns 4% per year. Stealing a car, is like trying to get something
for nothing. 99% of people would avoid stealing the car
because the consequences outweigh the benefits. However when it comes to the stock market,
people seem to be under the impression that they can take option three, and steal from
the market. They try all kinds of tricks and strategies
to get good market returns without paying the price. Attempting to sell right before a dip or buy
right before a boom. Consider, for example, wanting to earn an
11% annual return over thirty years in preparation for your retirement. From 1950 to 2019, the Dow Jones Industrial
Average has returned about 11% per year. Over those 69 years however, of course there
were many high highs and low lows. For many the sight of their investments going
up and down can be traumatic, so they try to get in and out quickly, without paying
the price of volatility and uncertainty over the long term, akin to trying to steal the
car. The price you must pay is not just about dollars
or cents when investing; it's about accepting the emotions that volatility, fear and risk
can bring. Recognizing that successful investing comes
with a price is crucial. This price is not immediately obvious, but
you have to pay it, just like you would for any other product. The key is to convince yourself that the market's
fee is worth it, that it's an admission fee worth paying. There's no guarantee that it will be, but
if you see the admission fee as a fine, you'll never enjoy the experience. Be willing to pay the price once you
find it. Hedonic Treadmills (enough) Know when enough is enough. Become familiar with the concept of Hedonic
Adaptation or The Hedonic Treadmill. Every time you hit the goal, you keep moving
the goalpost further ahead. You need only look at the demise of Bernie
Madoff and Gupta, two men who already had everything and were ultra-wealthy. But All the money in the world would never
have been enough, both resorting to crime to make even more money. The pursuit of wealth and success without
a sense of knowing when enough is enough is like climbing a never-ending ladder. No matter how high one climbs, there is always
another rung to reach for, and the pursuit can become all-consuming, leading to a lack
of happiness and fulfillment.
