The Psychology of Money

The Psychology of Money

Book indtroduciton

Why recommend this book?

The Psychology of Money” is a book about money and wealth by Morgan Housel. This book is about some classic financial and investing ideas, such as Nassim Taleb, Daniel Kahneman and Warren Buffett. This is great for young people, or readers who have rarely read finance or investment books before, because this book has compiled for you some of the most recognized and well-respected principles of getting rich in life.

The contents of the book are all things that have been discussed by other people. Don’t expect the author to have original or brand-new ideas in this book. This is not the author’s original intention.

Advanced books for the next level

This is a great book on the topic of whether investors can advance to the “next level”. This book doesn’t talk about details, it talks about direction. But the direction is the most important!

Legend investment books are similar

There are very few really useful views of the books on the market that talk about getting rich, and they are all similar in nature. I also wrote an article before, “The main investment principles of successful investors are similar” and my views are very similar to those discussed in the books. These legend methods or viewpoints will not lose their luster with the pass of time; on the contrary, they prove that these principles are truths that can withstand the test. This reminds me of another book review I wrote on this blog a few months ago, “Richer, Wiser, Happier”, these two books have the same central idea, but author’s focus is different.

Long-term and sustainable

Time compounding is important for investors

Buffett’s net worth is $84.5 billion. Of this, $84.2 billion (99.74%) was accumulated after his 50th birthday. $81.5 billion (96.5%) came after he was in his 60s.

Buffett’s investment career has an annualized return of 22%. Since 1988, Renaissance’s Simmons has made a 66% annualized return on his investments to $21B, but is 75% lower than Buffett’s. The main reason is that Simons didn’t go all-in on investing until he was 50 years old. I mentioned this point 1-1 in my “The Rules of Super Growth Stocks Investing” book, and emphasized the biggest difference between the two.

Good investments are rare

In 2013, Buffett said that he owned 400 to 500 stocks in his life, and most of the money was made in 10 of them.

The most important thing is to keep

Making money requires taking risks, being optimistic, and continuing to do so. But saving money requires the opposite of risk, which requires humility and the constant fear that whatever you do will result in your possessions being taken away very quickly.

Buffett: “There’s no reason to take any risk on something you already have, or something you don’t need but don’t have.”

Nassim Taleb: “Having an edge and surviving are two different things: the former needs the latter. You have to do whatever it takes to avoid screwing things up.”

A lot of things in business and investing work this way—the long tails (note 1), the furthest reaches of the distribution of outcomes, have huge implications in finance. And a few of these events can explain most of the results.

Note 1: The long tail effect refers to the fact that those products or services with small sales volume but a large variety of products or services that are not valued originally will have a huge cumulative total number or revenue, which will exceed the total number and revenue of a few mainstream products. In the Internet, finance, investment, statistics and other fields, the long tail effect is particularly significant.


The world of investing is not 100%

Investors can be wrong half the time and still get rich. It sounds incredible, and it’s hard to comprehend.

Your personal experience with money may account for 0.00000001% of what happens in the world, but maybe 80% of your view of the world works.

Michael Moritz of Sequoia Capital said: “We assume that tomorrow will not be like yesterday. We cannot assume that yesterday’s success will translate into tomorrow’s good luck.”

The world is unpredictable

History can mislead the future of the economy and the stock market because it fails to take into account the structural changes relevant to today’s world.

Forbes’ list of the top 400 richest people, on average, 1/5 of the list is updated every ten years.

There is no such thing as black and white

Most things in the world are not as good or as bad as they appear as it looks like.

Whether it is “inspirational and boldness” or “stupidly reckless”, the line between the two may be only a millimeter, and only after the fact can judge. The line between boldness and recklessness can be fine, and when we don’t give proper calculation to risk and luck, they are often invisible.

Be careful who you praise and admire, and also be careful who you despise and wish to avoid being.

The more common a pattern is, the more it applies to your life. Therefore, focus less on rare specific individuals, specific, or case studies and more on broad patterns.

The Psychology of Money

Alternative Investments

Some great investors buy large collections of art and paintings, hold them long enough to get the best returns (Note 2), and it turns out that this can also be a great investment.

Note 2: According to market research firm Market Decipher, global collectibles sales are expected to increase from $412 billion to $692 billion over the next 10 years. Element Pointe Advisors, a Miami-based wealth management firm, said: “For investors, it is wise to take a long-term view. Many collectibles may be unsustainable in value over the next two or three years. Any buyer should own them for more than 10 years. Don’t expect to be profitable in the short term.” That’s because in a recession, collectibles are more vulnerable to price drops than other assets because many of them aren’t essential.

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