• “The world is full of obvious things which nobody by any chance ever observes.” —Sherlock Holmes

INTRODUCTION: The Greatest Show On Earth

• The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people.

• My favorite Wikipedia entry begins: “Ronald James Read was an American philanthropist, investor, janitor, and gas station attendant.”

• financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.

• knowing what to do tells you nothing about what happens in your head when you try to do it.

• Voltaire’s observation that “History never repeats itself; man always does.” It applies so well to how we behave with money.

1. No One’s Crazy

• Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.

• People do some crazy things with money. But no one is crazy.

• Everyone has their own unique experience with how the world works.

• The person who grew up in poverty thinks about risk and reward in ways the child of a wealthy banker cannot fathom if he tried.

• Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.

• The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty.

• Few people make financial decisions purely with a spreadsheet. They make them at the dinner table, or in a company meeting.

• The New York Times wrote in 1955 about the growing desire, but continued inability, to retire:

2. Luck & Risk

• “Nothing is as good or as bad as it seems.”

• Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort.

• Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.

• be careful when assuming that 100% of outcomes can be attributed to effort and decisions.

• not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.

• Therefore, focus less on specific individuals and case studies and more on broad patterns.

• You’ll get closer to actionable takeaways by looking for broad patterns of success and failure.

• Trying to emulate Warren Buffett’s investment success is hard,

• But realizing, as we’ll see in chapter 7, that people who have control over their time tend to be happier in life is a broad and common enough observation that you can do something with it.

• if you acknowledge that luck brought you success then you have to believe in luck’s cousin, risk, which can turn your story around just as quickly.

• But more important is that as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves and leave room for understanding when judging failures.

• Nothing is as good or as bad as it seems.

3. Never Enough

• When rich people do crazy things

• At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, “Yes, but I have something he will never have … enough.”

• Gupta and Rajaratnam both went to prison for insider trading, their careers and reputations irrevocably ruined.

• There is no reason to risk what you have and need for what you don’t have and don’t need.

• The hardest financial skill is getting the goalpost to stop moving.

• If expectations rise with results there is no logic in striving for more because you’ll feel the same after putting in extra effort.

• In that case one step forward pushes the goalpost two steps ahead. You feel as if you’re falling behind, and the only way to catch up is to take greater and greater amounts of risk.

• Modern capitalism is a pro at two things: generating wealth and generating envy.

• Social comparison is the problem here.

• the ceiling of social comparison is so high that virtually no one will ever hit it.

• Which means it’s a battle that can never be won, or that the only way to win is to not fight to begin with—to accept that you might have enough, even if it’s less than those around you.

• “The only way to win in a Las Vegas casino is to exit as soon as you enter.”

• “Enough” is not too little.

• The idea of having “enough” might look like conservatism, leaving opportunity and potential on the table. I don’t think that’s right.

• “Enough” is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret.

• There are many things never worth risking, no matter the potential gain.

• Reputation is invaluable. Freedom and independence are invaluable. Family and friends are invaluable. Being loved by those who you want to love you is invaluable. Happiness is invaluable.

• your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them.

4. Confounding Compounding

• $81.5 billion of Warren Buffett’s $84.5 billion net wort came after his 65th birthday. Our minds are not built to handle such absurdities.

• Gwen Schultz put it: “It is not necessarily the amount of snow that causes ice sheets but the fact that snow, however little, lasts.”

• The big takeaway from ice ages is that you don’t need tremendous force to create tremendous results.

• Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child.

• As I write this Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s.

• Buffett is the richest investor of all time. But he’s not actually the greatest—at least not when measured by average annual returns.

• Simons’ net worth, as I write, is $21 billion.

• Because Simons did not find his investment stride until he was 50 years old. He’s had less than half as many years to compound as Buffett.

• The counterintuitive nature of compounding leads even the smartest of us to overlook its power.

• The danger here is that when compounding isn’t intuitive we often ignore its potential and focus on solving problems through other means.

• There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called Shut Up And Wait.

• good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated.

• It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time.

5. Getting Wealthy vs Staying Wealthy

• Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.

• There are a million ways to get wealthy, But there’s only one way to stay wealthy: some combination of frugality and paranoia.

• Getting money is one thing. Keeping it is another.

• Getting money requires taking risks, being optimistic, and putting yourself out there.

• But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.

• We can’t afford to rest on our laurels. We can’t be complacent. We can’t assume that yesterday’s success translates into tomorrow’s good fortune.

• There are two reasons why a survival mentality is so key with money.

• The other, as we saw in chapter 4, is the counterintuitive math of compounding.

• Compounding only works if you can give an asset years and years to grow.

• Nassim Taleb put it this way: “Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.”

• Applying the survival mindset to the real world comes down to appreciating three things.

• More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.

• Compounding doesn’t rely on earning big returns. Merely good returns sustained uninterrupted for the longest period of time—especially in times of chaos and havoc—will always win.

• Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.

• few plans of any kind survive their first encounter with the real world.

• A plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality.

• The more you need specific elements of a plan to be true, the more fragile your financial life becomes.

• “It’d be great if the market returns 8% a year over the next 30 years, but if it only does 4% a year I’ll still be OK,”

• Many bets fail not because they were wrong, but because they were mostly right in a situation that required things to be exactly right.

• Room for error—often called margin of safety—is one of the most underappreciated forces in finance.

• It comes in many forms: A frugal budget, flexible thinking, and a loose timeline—anything that lets you live happily with a range of outcomes.

• A barbelled personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.

• Sensible optimism is a belief that the odds are in your favor, and over time things will balance out to a good outcome even if what happens in between is filled with misery.

• Destruction in the face of progress is not only possible, but an efficient way to get rid of excess.

• A mindset that can be paranoid and optimistic at the same time is hard to maintain, because seeing things as black or white takes less effort than accepting nuance.

• But you need short-term paranoia to keep you alive long enough to exploit long-term optimism.

6. Tails, You Win

• You can be wrong half the time an still make a fortune

• “I’ve been banging away at this thing for 30 years. I think the simple math is, some projects work and some don’t. There’s no reason to belabor either one. Just get on to the next.” —Brad Pitt accepting a Screen Actors Guild Award

• The great art dealers operated like index funds. They bought everything they could. And they bought it in portfolios, not individual pieces they happened to like. Then they sat and waited for a few winners to emerge.

• Long tails—the farthest ends of a distribution of outcomes—have tremendous influence in finance, where a small number of events can account for the majority of outcomes.

• The distribution of success among large public stocks over time is not much different than it is in venture capital.

• Most public companies are duds, a few do well, and a handful become extraordinary winners that account for the majority of the stock market’s returns.

• The Russell 3000 has increased more than 73-fold since 1980.

• In 2018, Amazon drove 6% of the S&P 500’s returns. And Amazon’s growth is almost entirely due to Prime and Amazon Web Services, which itself are tail events in a company that has experimented with hundreds of products, from the Fire Phone to travel agencies.

• And who’s working at these companies? Google’s hiring acceptance rate is 0.2%. Facebook’s is 0.1%. Apple’s is about 2%. So the people working on these tail projects that drive tail returns have tail careers.

• Napoleon’s definition of a military genius was, “The man who can do the average thing when all those around him are going crazy.”

• A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.

• Peter Lynch is one of the best investors of our time. “If you’re terrific in this business, you’re right six times out of 10,” he once said.

• Part of why this isn’t intuitive is because in most fields we only see the finished product, not the losses incurred that led to the tail-success product.

• At the Berkshire Hathaway shareholder meeting in 2013 Warren Buffett said he’s owned 400 to 500 stocks during his life and made most of his money on 10 of them.

7. Freedom

• Controlling your time is the highest dividend money pays

• The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”

• if there’s a common denominator in happiness—a universal fuel of joy—it’s that people want to control their lives.

• The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.

• Angus Campbell was a psychologist at the University of Michigan. Born in 1910,

• His 1981 book, The Sense of Wellbeing in America, starts by pointing out that people are generally happier than many psychologists assumed.

• Campbell summed it up: Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of wellbeing than any of the objective conditions of life we have considered.

• Six months’ emergency expenses means not being terrified of your boss, because you know you won’t be ruined if you have to take some time off to find a new job.

• Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with.

• doing something you love on a schedule you can’t control can feel the same as doing something you hate.

• There is a name for this feeling. Psychologists call it reactance.

• John D. Rockefeller was one of the most successful businessmen of all time. He was also a recluse, spending most of his time by himself. He rarely spoke, deliberately making himself inaccessible and staying quiet when you caught his attention.

• A refinery worker who occasionally had Rockefeller’s ear once remarked: “He lets everybody else talk, while he sits back and says nothing.”

• Rockefeller’s job wasn’t to drill wells, load trains, or move barrels. It was to think and make good decisions.

• Rockefeller’s product—his deliverable—wasn’t what he did with his hands, or even his words. It was what he figured out inside his head. So that’s where he spent most of his time and energy.

• More of us have jobs that look closer to Rockefeller than a typical 1950s manufacturing worker, which means our days don’t end when we clock out and leave the factory. We’re constantly working in our heads, which means it feels like work never ends.

• Compared to generations prior, control over your time has diminished. And since controlling your time is such a key happiness influencer, we shouldn’t be surprised that people don’t feel much happier even though we are, on average, richer than ever.

• “Your kids don’t want your money (or what your money buys) anywhere near as much as they want you. Specifically, they want you with them,”

8. Man in the Car Paradox

• No one is impressed with your possessions as much as you are.

• When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead, you think, “Wow, if I had that car people would think I’m cool.”

• people tend to want wealth to signal to others that they should be liked and admired.

• But in reality those other people often bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired.

• The letter I wrote after my son was born said, “You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does—especially from the people you want to respect and admire you.”

• If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever will.

9. Wealth is What You Don’t See

• Spending money to show people how much money you have is the fastest way to have less money.

• Money has many ironies. Here’s an important one: Wealth is what you don’t see.

• Someone driving a $100,000 car might be wealthy. But the only data point you have about their wealth is that they have $100,000 less than they did before they bought the car (or $100,000 more in debt). That’s all you know about them.

• Wealth is the nice cars not purchased. The diamonds not bought.

• Wealth is financial assets that haven’t yet been converted into the stuff you see.

• Singer Rihanna nearly went bankrupt after overspending and sued her financial advisor. The advisor responded: “Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?”³⁰

• When most people say they want to be a millionaire, what they might actually mean is “I’d like to spend a million dollars.” And that is literally the opposite of being a millionaire.

• The only way to be wealthy is to not spend the money that you do have. It’s not just the only way to accumulate wealth; it’s the very definition of wealth.

• We should be careful to define the difference between wealthy and rich.

• Rich is a current income.

• It’s not hard to spot rich people. They often go out of their way to make themselves known.

• But wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later.

• Diet and exercise offer a useful analogy.

• Exercise is like being rich. You think, “I did the work and I now deserve to treat myself to a big meal.”

• Wealth is turning down that treat meal and actually burning net calories. It’s hard, and requires self-control. But it creates a gap between what you could do and what you choose to do that accrues to you over time.

• The problem for many of us is that it is easy to find rich role models. It’s harder to find wealthy ones because by definition their success is more hidden.

• There are, of course, wealthy people who also spend a lot of money on stuff. But even in those cases what we see is their richness, not their wealth.

• We see the cars they chose to buy and perhaps the school they choose to send their kids to. We don’t see the savings, retirement accounts, or investment portfolios.

• We see the homes they bought, not the homes they could have bought had they stretched themselves thin.

• most people, deep down, want to be wealthy. They want freedom and flexibility, which is what financial assets not yet spent can give you.

• But it is so ingrained in us that to have money is to spend money that we don’t get to see the restraint it takes to actually be wealthy. And since we can’t see it, it’s hard to learn about it.

• People are good at learning by imitation. But the hidden nature of wealth makes it hard to imitate others and learn from their ways.

• The world is filled with people who look modest but are actually wealthy and people who look rich who live at the razor’s edge of insolvency. Keep this in mind when quickly judging others’ success and setting your own goals.

10. Save Money

• The only factor you control generates one of the only things that matters. How wonderful

• The first idea—simple, but easy to overlook—is that building wealth has little to do with your income or investment returns, and lots to do with your savings rate.

• The biggest reason we overcame the oil crisis is because we started building cars, factories, and homes that are more energy efficient than they used to be.

• The world grew its “energy wealth” not by increasing the energy it had, but by decreasing the energy it needed.

• The same is true with our money.

• Investment returns can make you rich. But whether an investing strategy will work, and how long it will work for, and whether markets will cooperate, is always in doubt. Results are shrouded in uncertainty.

• Personal savings and frugality—finance’s conservation and efficiency—are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future as they are today.

• Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more.

• More importantly, the value of wealth is relative to what you need.

• There are professional investors who grind 80 hours a week to add a tenth of a percentage point to their returns when there are two or three full percentage points of lifestyle bloat in their finances that can be exploited with less effort.

• the fact that there’s so much effort put into one side of the finance equation and so little put into the other is an opportunity for most people.

• Past a certain level of income, what you need is just what sits below your ego.

• one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.

• It’s a daily struggle against instincts to extend your peacock feathers to their outermost limits and keep up with others doing the same.

• People with enduring personal finance success—not necessarily those with high incomes—tend to have a propensity to not give a damn what others think about them.

• So people’s ability to save is more in their control than they might think.

• And you don’t need a specific reason to save.

• saving does not require a goal of purchasing something specific.

• Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.

• the intangible benefits of money can be far more valuable and capable of increasing your happiness than the tangible things that are obvious targets of our savings.

• Savings without a spending goal gives you options and flexibility,

• When you don’t have control over your time, you’re forced to accept whatever bad luck is thrown your way.

• But if you have flexibility you have the time to wait for no-brainer opportunities to fall in your lap. This is a hidden return on your savings.

• Savings in the bank that earn 0% interest might actually generate an extraordinary return if they give you the flexibility to take a job with a lower salary but more purpose, or wait for investment opportunities that come when those without flexibility turn desperate.

• And that hidden return is becoming more important.

• A hyper-connected world means the talent pool you compete in has gone from hundreds or thousands spanning your town to millions or billions spanning the globe.

• In a world where intelligence is hyper-competitive and many previous technical skills have become automated, competitive advantages tilt toward nuanced and soft skills—like communication, empathy, and, perhaps most of all, flexibility.

• If you have flexibility you can wait for good opportunities, both in your career and for your investments.

• That’s why more people can, and more people should, save money.

11. Reasonable > Rational

• Aiming to be mostly reasonable works better than trying to be coldly rational

• You’re not a spreadsheet. You’re a person. A screwed up, emotional person.

• Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.

• We now have better, more scientific evidence of fever’s usefulness in fighting infection. A one-degree increase in body temperature has been shown to slow the replication rate of some viruses by a factor of 200.

• “Treatment of fever is common in the ICU setting and likely related to standard dogma rather than evidence-based practice.”³⁶

• If fevers are beneficial, why do we fight them so universally? I don’t think it’s complicated: Fevers hurt. And people don’t want to hurt.

• That philosophy—aiming to be reasonable instead of rational—is one more people should consider when making decisions with their money.

• Academic finance is devoted to finding the mathematically optimal investment strategies. My own theory is that, in the real world, people do not want the mathematically optimal strategy. They want the strategy that maximizes for how well they sleep at night.

• A reasonable investor makes them in a conference room surrounded by co-workers you want to think highly of you, with a spouse you don’t want to let down, or judged against the silly but realistic competitors that are your brother-in-law, your neighbor, and your own personal doubts.

• What’s often overlooked in finance is that something can be technically true but contextually nonsense.

• If you view “do what you love” as a guide to a happier life, it sounds like empty fortune cookie advice.

• If you view it as the thing providing the endurance necessary to put the quantifiable odds of success in your favor, you realize it should be the most important part of any financial strategy.

• There are several other times when it’s fine to be reasonable instead of rational with money.

12. Surprise!

• History is the study of change, ironically used as a map of the future.

• Stanford professor Scott Sagan once said something everyone who follows the economy or investment markets should hang on their wall: “Things that have never happened before happen all the time.”

• History is mostly the study of surprising events. But it is often used by investors and economists as an unassailable guide to the future.

• A trap many investors fall into is what I call “historians as prophets” fallacy: An overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress.

• If you view investing as a hard science, history should be a perfect guide to the future. Geologists can look at a billion years of historical data and form models of how the earth behaves. So can meteorologists. And doctors—kidneys operate the same way in 2020 as they did in 1020.

• But investing is not a hard science. It’s a massive group of people making imperfect decisions with limited information about things that will have a massive impact on their wellbeing, which can make even smart people nervous, greedy and paranoid.

• Richard Feynman, the great physicist, once said, “Imagine how much harder physics would be if electrons had feelings.” Well, investors have feelings.

• experience leads to overconfidence more than forecasting ability.

• Two dangerous things happen when you rely too heavily on investment history as a guide to what’s going to happen next.

• You’ll likely miss the outlier events that move the needle the most.

• A handful of outlier events play an enormous role because they influence so many unrelated events in their wake.

• Another way to put this is that 0.00000000004% of people were responsible for perhaps the majority of the world’s direction over the last century.

• The thing that makes tail events easy to underappreciate is how easy it is to underestimate how things compound.

• for example, 9/11 prompted the Federal Reserve to cut interest rates, which helped drive the housing bubble, which led to the financial crisis, which led to a poor jobs market, which led tens of millions to seek a college education, which led to $1.6 trillion in student loans with a 10.8% default rate.

• It’s not intuitive to link 19 hijackers to the current weight of student loans, but that’s what happens in a world driven by a few outlier tail events.

• The same can be seen in the Fukushima nuclear reactor, which experienced a catastrophic failure in 2011 when a tsunami struck. It had been built to withstand the worst past historical earthquake, with the builders not imagining much worse—and not thinking that the worst past event had to be a surprise, as it had no precedent.

• This is not a failure of analysis. It’s a failure of imagination.

• The correct lesson to learn from surprises is that the world is surprising. Not that we should use past surprises as a guide to future boundaries; that we should use past surprises as an admission that we have no idea what might happen next.

• This is true for both scary events like recessions and wars, and great events like innovation.

• History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes that are relevant to today’s world.

• The 401(k) is 42 years old. The Roth IRA is younger, created in the 1990s.

• The average time between recessions has grown from about two years in the late 1800s to five years in the early 20th century to eight years over the last half-century.

• The Intelligent Investor is one of the greatest investing books of all time. But I don’t know a single investor who has done well implementing Graham’s published formulas. The book is full of wisdom—perhaps more than any other investment book ever published. But as a how-to guide, it’s questionable at best.

• Graham died in 1976. If the formulas he advocated were discarded and updated five times between 1934 and 1972, how relevant do you think they are in 2020? Or will be in 2050?

• An interesting quirk of investing history is that the further back you look, the more likely you are to be examining a world that no longer applies to today.

• That doesn’t mean we should ignore history when thinking about money. But there’s an important nuance: The further back in history you look, the more general your takeaways should be.

13. Room for Error

• The most important part of every plan is planning on your plan not going according to plan.

• Benjamin Graham is known for his concept of margin of safety. He wrote about it extensively and in mathematical detail. But my favorite summary of the theory came when he mentioned in an interview that “the purpose of the margin of safety is to render the forecast unnecessary.”

• Margin of safety—you can also call it room for error or redundancy—is the only effective way to safely navigate a world that is governed by odds, not certainties. And almost everything related to money exists in that kind of world.

• One is the idea that somebody must know what the future holds, driven by the uncomfortable feeling that comes from admitting the opposite.

• The second is that you’re therefore doing yourself harm by not taking actions that fully exploit an accurate view of that future coming true.

• Room for error lets you endure a range of potential outcomes, and endurance lets you stick around long enough to let the odds of benefiting from a low-probability outcome fall in your favor.

• Spreadsheets are good at telling you when the numbers do or don’t add up. They’re not good at modeling how you’ll feel when you tuck your kids in at night wondering if the investment decisions you’ve made were a mistake that will hurt their future.

• Having a gap between what you can technically endure versus what’s emotionally possible is an overlooked version of room for error.

• you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking.

• if something has 95% odds of being right, the 5% odds of being wrong means you will almost certainly experience the downside at some point in your life. And if the cost of the downside is ruin, the upside the other 95% of the time likely isn’t worth the risk, no matter how appealing it looks.

• Leverage is the devil here. Leverage—taking on debt to make your money go further—pushes routine risks into something capable of producing ruin.

• You can plan for every risk except the things that are too crazy to cross your mind. And those crazy things can do the most harm, because they happen more often than you think and you have no plan for how to deal with them.

• Avoiding these kinds of unknown risks is, almost by definition, impossible. You can’t prepare for what you can’t envision.

• If there’s one way to guard against their damage, it’s avoiding single points of failure.

• if many things rely on one thing working, and that thing breaks, you are counting the days to catastrophe.

• The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.

• It’s fine to save for a car, or a home, or for retirement. But it’s equally important to save for things you can’t possibly predict or even comprehend—the

• I save a lot, and I have no idea what I’ll use the savings for in the future.

• the most important part of every plan is planning on your plan not going according to plan.

14. You’ll Change

• Long-term planning is harder than it seems because people’s goals and desires change over time.

• An underpinning of psychology is that people are poor forecasters of their future selves.

• The End of History Illusion is what psychologists call the tendency for people to be keenly aware of how much they’ve changed in the past, but to underestimate how much their personalities, desires, and goals are likely to change in the future.

• young people pay good money to get tattoos removed that teenagers paid good money to get.

• there are two things to keep in mind when making what you think are long-term decisions.

• Assuming you’ll be happy with a very low income, or choosing to work endless hours in pursuit of a high one, increases the odds that you’ll one day find yourself at a point of regret.

• Compounding works best when you can give a plan years or decades to grow. This is true for not only savings but careers and relationships. Endurance is key.

• Some of the most miserable workers I’ve met are people who stay loyal to a career only because it’s the field they picked when deciding on a college major at age 18.

• When you accept the End of History Illusion, you realize that the odds of picking a job when you’re not old enough to drink that you will still enjoy when you’re old enough to qualify for Social Security are low.

• Sunk costs—anchoring decisions to past efforts that can’t be refunded—are a devil in a world where people change over time.

• They make our future selves prisoners to our past, different, selves. It’s the equivalent of a stranger making major life decisions for you.

• The quicker it’s done, the sooner you can get back to compounding.

15. Nothing’s Free

• Everything has a price, but not all prices appear on labels.

• The problem is that the price of a lot of things is not obvious until you’ve experienced them firsthand, when the bill is overdue.

• Immelt told his successor, “Every job looks easy when you’re not the one doing it.”

• the challenges faced by someone in the arena are often invisible to those in the crowd.

• Most things are harder in practice than they are in theory.

• Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret—all of which are easy to overlook until you’re dealing with them in real time.

• Netflix stock returned more than 35,000% from 2002 to 2018, but traded below its previous all-time high on 94% of days.

• Monster Beverage returned 319,000% from 1995 to 2018—among the highest returns in history—but traded below its previous high 95% of the time during that period.

• Why do so many people who are willing to pay the price of cars, houses, food, and vacations try so hard to avoid paying the price of good investment returns?

• The answer is simple: The price of investing success is not immediately obvious. It’s not a price tag you can see, so when the bill comes due it doesn’t feel like a fee for getting something good. It feels like a fine for doing something wrong.

• thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor.

• if you view volatility as a fee, things look different.

• Market returns are never free and never will be.

• The trick is convincing yourself that the market’s fee is worth it.

• There’s no guarantee that it will be. Sometimes it rains at Disneyland.

16. You & Me

• Beware taking financial cues from people playing a different game than you are.

• greed is an indelible feature of human nature.

• I don’t think we’ll ever be able to fully explain why bubbles occur. It’s like asking why wars occur—there are almost always several reasons, many of them conflicting, all of them controversial.

• But let me propose one reason they happen that both goes overlooked and applies to you personally: Investors often innocently take cues from other investors who are playing a different game than they are.

• Bubbles aren’t so much about valuations rising. That’s just a symptom of something else: time horizons shrinking as more short-term traders enter the playing field.

• The same thing happened during the housing bubble of the mid-2000s.

• It’s hard to justify paying $700,000 for a two-bedroom Florida track home to raise your family in for the next 10 years. But it makes perfect sense if you plan on flipping the home in a few months into a market with rising prices to make a quick profit.

• The formation of bubbles isn’t so much about people irrationally participating in long-term investing. They’re about people somewhat rationally moving toward short-term trading to capture momentum that had been feeding on itself.

• Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.

• Many finance and investment decisions are rooted in watching what other people do and either copying them or betting against them.

• But when you don’t know why someone behaves like they do you won’t know how long they’ll continue acting that way, what will make them change their mind, or whether they’ll ever learn their lesson.

• When a commentator on CNBC says, “You should buy this stock,” keep in mind that they do not know who you are.

• Being swayed by people playing a different game can also throw off how you think you’re supposed to spend your money.

• So much consumer spending, particularly in developed countries, is socially driven: subtly influenced by people you admire, and done because you subtly want people to admire you.

• A young lawyer aiming to be a partner at a prestigious law firm might need to maintain an appearance that I, a writer who can work in sweatpants, have no need for. But when his purchases set my own expectations, I’m wandering down a path of potential disappointment because I’m spending the money without the career boost he’s getting. We might not even have different styles. We’re just playing a different game. It took me years to figure this out.

• A takeaway here is that few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.

17. The Seduction of Pessimism

• Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.

• “For reasons I have never understood, people like to hear that the world is going to hell.” —Historian Deirdre McCloskey

• Optimism is the best bet for most people because the world tends to get better for most people most of the time.

• Pessimism isn’t just more common than optimism. It also sounds smarter.

• Real optimists don’t believe that everything will be great. That’s complacency. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way.

• The simple idea that most people wake up in the morning trying to make things a little better and more productive than wake up looking to cause trouble is the foundation of optimism.

• Tell someone they’re in danger and you have their undivided attention.

• There are two topics that will affect your life whether you are interested in them or not: money and health.

• A third is that progress happens too slowly to notice, but setbacks happen too quickly to ignore.

18. When You’ll Believe Anything

• Appealing fictions, and why stories are more powerful than statistics.

• in careers, where reputations take a lifetime to build and a single email to destroy.

• At the personal level, there are two things to keep in mind about a story-driven world when managing your money.

• The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.

• There are many things in life that we think are true because we desperately want them to be true.

• I call these things “appealing fictions.” They have a big impact on how we think about money—particularly investments and the economy.

• An appealing fiction happens when you are smart, you want to find solutions, but face a combination of limited control and high stakes.

• what they want to be true is unequivocally

• Consider that 85% of active mutual funds underperformed their benchmark over the 10 years ending 2018.⁶⁵ That figure has been fairly stable for generations.

• You would think an industry with such poor performance would be a niche service and have a hard time staying in business. But there’s almost five trillion dollars invested in these funds.⁶⁶

• Give someone the chance of investing alongside “the next Warren Buffett” and they’ll believe with such faith that millions of people will put their life savings behind it.

• The bigger the gap between what you want to be true and what you need to be true to have an acceptable outcome, the more you are protecting yourself from falling victim to an appealing financial fiction.

• It’s hard for a policymaker to predict an outright recession, because a recession will make their careers complicated. So even worst-case projections rarely expect anything worse than just “slow-ish” growth.

• It’s an appealing fiction, and it’s easy to believe because expecting anything worse is too painful to consider.

• It can’t be overstated: there is no greater force in finance than room for error, and the higher the stakes, the wider it should be.

• Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.

• Just like my daughter, I don’t know what I don’t know. So I am just as susceptible to explaining the world through the limited set of mental models I have at my disposal.

• Those who read history tend to look for what proves them right and confirms their personal opinions.

• They resist inconvenient truth since everyone wants to be on the side of the angels. Just as we start wars to end all wars.

• Coming to terms with how much you don’t know means coming to terms with how much of what happens in the world is out of your control. And that can be hard to accept.

• I once calculated that if you just assume that the market goes up every year by its historic average, your accuracy is better than if you follow the average annual forecasts of the top 20 market strategists from large Wall Street banks.

• Business, economics, and investing, are fields of uncertainty, overwhelmingly driven by decisions that can’t easily be explained with clean formulas, like a trip to Pluto can.

19. All Together Now

• What we’ve learned about the psychology of your own money.

• This chapter is a bit of a summary; a few short and actionable lessons that can help you make better financial decisions.

• I can’t tell you what to do with your money, because I don’t know you.

• Be nicer and less flashy. No one is impressed with your possessions as much as you are.

• You might think you want a fancy car or a nice watch. But what you probably want is respect and admiration. And you’re more likely to gain those things through kindness and humility than horsepower and chrome.

• Define the game you’re playing, and make sure your actions are not being influenced by people playing a different game.

• Respect the mess. Smart, informed, and reasonable people can disagree in finance, because people have vastly different goals and desires. There is no single right answer; just the answer that works for you.

20. Confessions

• Half of all U.S. mutual fund portfolio managers do not invest a cent of their own money in their funds, according to Morningstar.⁶⁹

• important financial decisions are not made in spreadsheets or in textbooks. They are made at the dinner table.

• They often aren’t made with the intention of maximizing returns, but minimizing the chance of disappointing a spouse or child.

• Charlie Munger once said “I did not intend to get rich. I just wanted to get independent.”

• Being able to wake up one morning and change what you’re doing, on your own terms, whenever you’re ready, seems like the grandmother of all financial goals.

• Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want.

• Independence, at any income level, is driven by your savings rate.

• Despite more than a decade of rising incomes—myself in finance, my wife in health care—we’ve more or less stayed at that lifestyle ever since. That’s pushed our savings rate continuously higher.

• Our savings rate is fairly high, but we rarely feel like we’re repressively frugal because our aspirations for more stuff haven’t moved much.

• Most of what we get pleasure from—going for walks, reading, podcasts—costs little, so we rarely feel like we’re missing out.

• On the rare occasion when I question our savings rate I think of the independence my parents earned from years of high savings, and I quickly come back.

• Nassim Taleb explained: “True success is exiting some rat race to modulate one’s activities for peace of mind.” I like that.

• We own our house without a mortgage, which is the worst financial decision we’ve ever made but the best money decision we’ve ever made.

• Good decisions aren’t always rational. At some point you have to choose between being happy or being “right.”

• We also keep a higher percentage of our assets in cash than most financial advisors would recommend—something around 20% of our assets outside the value of our house.

• Charlie Munger put it well: “The first rule of compounding is to never interrupt it unnecessarily.”

• How my family thinks about investing

• I’ve shifted my views and now every stock we own is a low-cost index fund.

• Every investor should pick a strategy that has the highest odds of successfully meeting their goals. And I think for most investors, dollar-cost averaging into a low-cost index fund will provide the highest odds of long-term success.

• (The statistics show 85% of large-cap active managers didn’t beat the S&P 500 over the decade ending 2019.)⁷¹

• Over the years I came around to the view that we’ll have a high chance of meeting all of our family’s financial goals if we consistently invest money into a low-cost index fund for decades on end, leaving the money alone to compound.

• I can afford to not be the greatest investor in the world, but I can’t afford to be a bad one.

• There’s no set goal—it’s just whatever is leftover after we spend. We max out retirement accounts in the same funds, and contribute to our kids’ 529 college savings plans.

• Effectively all of our net worth is a house, a checking account, and some Vanguard index funds.

• One of my deeply held investing beliefs is that there is little correlation between investment effort and investment results.

POSTSCRIPT: A Brief History of Why the U.S Consumer Thinks the Way They Do

• August, 1945. World War II ends.

• Low interest rates and the intentional birth of the American consumer.

• Household debt in the 1950s grew 1.5 times faster than it did during the 2000s debt splurge.

• Pent-up demand for stuff fed by a credit boom and a hidden 1930s productivity boom led to an economic boom.

• necessity, the Great Depression had supercharged resourcefulness, productivity, and innovation.

• Gains are shared more equally than ever before.

• The defining characteristic of economics in the 1950s is that the country got rich by making the poor less poor. Average wages doubled from 1940 to 1948, then doubled again by 1963.

• Debt rose tremendously. But so did incomes, so the impact wasn’t a big deal.

• Things start cracking.

• Expectations always move slower than facts.

• The boom resumes, but it’s different than before.

• Between 1993 and 2012, the top 1 percent saw their incomes grow 86.1 percent, while the bottom 99 percent saw just 6.6 percent growth.

• All that matters is that sharp inequality became a force over the last 35 years, and it happened during a period where, culturally, Americans held onto two ideas rooted in the post-WW2 economy: That you should live a lifestyle similar to most other Americans, and that taking on debt to finance that lifestyle is acceptable.

• The big stretch.

• A culture of equality and togetherness that came out of the 1950s–1970s innocently morphs into a Keeping Up With The Joneses effect.

• Economist Hyman Minsky described the beginning of debt crises: The moment when people take on more debt than they can service. It’s an ugly, painful moment. It’s like Wile E. Coyote looking down, realizing he’s screwed, and falling precipitously.

• Once a paradigm is in place it is very hard to turn it around.

• The Tea Party, Occupy Wall Street, Brexit, and Donald Trump each represents a group shouting, “Stop the ride, I want off.”

• “The more the Internet exposes people to new points of view, the angrier people get that different views exist.”