Introduction

A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioural skills that have nothing to do with formal measures of intelligence.

Chapter 1: No One’s Crazy

Here’s the thing. People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons.

Everyone has their own unique experience with how the world works. And what you’ve experienced is more compelling than what you learn second hand. So all of us – you, me, everyone – go through life anchored to a set of views about how money works that vary wildly from person to person. What seems crazy to you might make sense to me.

You know stuff about money that I don’t, and vice versa. You go through life with different beliefs, goals, and forecasts, than I do. That’s not because one of us is smarter than the other or has better information. It’s because we’ve had different lives shaped by different and equally persuasive experiences.

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. So equally smart people can disagree about how and why recessions happen, how you should invest your money, what you should prioritize, how much risk you should take, and so on.

In theory people should make investment decisions based on their goals and the characteristics of the investment options available to them at the time.

But that’s not what people do.

Economists Ulrike Malendier and Stefan Nagel from the National Bureau of Economic Research found that people’s lifetime decisions are heavily anchored to the experiences those investors had in their own generation – especially experiences early in their adult life.

If you grew up when inflation was high, you invested less of your money in bonds later in life compared to those who grew up when inflation was low. If you happened to grow up when the stock market was strong, you invested more of your money in stocks later in life compared to those who grew up when stocks were weak.

The economists wrote: “Our findings suggest that individual investors’ willingness to bear risk depends on personal history.”

We all do crazy stuff with money because we’re all relatively new to this game and what looks crazy to you might make sense to me. But no one is crazy – we all make decisions based on our own unique experiences that seem to make sense to us in a given moment.

Chapter 2: Luck & Risk

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

NYU professor Scott Gallaway has a related idea that is so important to remember when judging success – both your own and others’: “Nothing is as good or bad as it seems.”

Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes. They are driven by the same thing: You are one person in a game of seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.

If you give luck and risk their proper respect, you realize that when judging people’s financial success – both your own and others’ – it’s never good or as bad as it seems.

The difficulty in identifying what is luck, what is skill, and what is risk is one of the biggest problems we face when trying to learn about the best way to manage money.

But two things can point you in a better direction.

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

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

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

Studying a specific person can be dangerous because we tend to study extreme examples – the billionaires, the CEO’s, or the massive failures that dominate the news – and extreme examples are often the least applicable to other situations, given their complexity. The more extreme the outcome, the less likely you can apply its lessons to your own life, because the more likely the outcome was influenced by extreme ends of luck or risk.

You’ll get closer to actionable takeaways by looking for broad patterns of success and failure. The more common the pattern, the more applicable it might be to your life. Trying to emulate Warren Buffet’s investment success is hard, because his results are so extreme that the role of luck in his lifetime performance is very likely high, and luck isn’t something you can reliably emulate. But realizing 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.

When things are going extremely well, realize it’s not as good as you think. You are not invincible, and 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.

Failure can be a lousy teacher, because it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk. The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed financial goal there won’t wipe you out so you can keep playing until the odds fall in your favour.

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.

Chapter 3: Never Enough

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

Remember a few things:

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

But it’s one of the most important. If expectations rise with results, there is no logic in striving for more because you’ll feel the same after putting in extra effort. It gets dangerous when the taste of having more – more money, more power, more prestige – increases ambition faster than satisfaction. 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. Perhaps they go hand in hand; wanting to surpass your peers can be the fuel of hard work. But life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations.

Social comparison is the problem here.

The point is that 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 not to fight to begin with – to accept that you might have enough, even if it’s less than those around you.

“Enough” is not too little.

The idea of having “enough” might look like conservatism, leaving opportunity and potential on the table.

However, “enough” is realizing 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.

And your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them. Knowing when you have enough.

Chapter 4: Confounding Compounding

If something compounds – if a little growth serves as the fuel for future growth – a small starting base can lead to results so extraordinary they seem to defy logic. It can be so logic-defying that you underestimate what’s possible, where growth comes from, and what it can lead to.

More than 2,000 books are dedicated to how Warren Buffet built his fortune. Many of them are wonderful. But few pay enough attention to the simplest fact: Buffet’s fortune isn’t due to just being a good investor but being a good investor since he was literally a child.

Warren Buffet is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30’s and retired in his 60’s, few people would have ever heard of him.

The practical takeaway is that the counter intuitiveness of compounding may be responsible for the majority of disappointing trades, bad strategies, and successful investing attempts.

You can’t blame people for devoting all their effort – effort in what they learn and what they do – to trying to earn the highest investment returns. It intuitively seems like the best way to get rich.

But 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. That’s when compounding runs wild.

Chapter 5: Getting Wealthy Versus Staying Wealthy

There are a million ways to get wealthy, and plenty of books on how to do so.

But there’s only one way to stay wealthy; some combination of frugality and paranoia.

If I had to summarize money success in a single word it would be “survival.”

Capitalism is hard. But part of the reason people lose their wealth is because getting money and keeping money are two different skills.

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.

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

One is the obvious: few gains are so great that they’re worth wiping yourself out over.

The other, is the counterintuitive math of compounding.

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

1. 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.

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

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

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.

Chapter 6: Tails, You Win

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.

That can be hard to deal with, even if you understand the math. It is not intuitive that an investor can be wrong half the time and still make a fortune. It means we underestimate how normal it is for a long of things to fail. Which causes us to overreact when they do.

Anything that is huge, profitable, famous, or influential is the result of a tail event – an outlying one-in-thousands or millions event. And most of our attention goes to things that are huge, profitable, famous, or influential. When most of what we pay attention to is the result of a tail, it’s easy to underestimate how rare and powerful they are.

If you want safer, predictable, and more stable returns, you invest in large public companies. Or so you might think. Remember, tails drive everything.

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 idea that a few things account for most results is not just true for companies in your investment portfolio. It’s also an important part of your own behaviour as an investor.

Most financial advice is about today. What should you do right now, and what stocks look like good buys today?

But most of the time today is not that important. Over the course of your lifetime as an investor the decisions that you make today or tomorrow or next week will not matter nearly as much as what you do during the small number of days – likely 1% of the time or less – when everyone else around you is 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.

When you accept that tails drive everything in business, investing, and finance, you realize that it’s normal for lots of things to go wrong, break, fail, and fall.

Chapter 7: Freedom

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

People want to become wealthier to make them happier. Happiness is a complicated subject because everyone’s different. But 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.

More than your salary. More than the size of your house. More than the prestige of your job. Control over doing what you want, when you want, with the people you want to, is the broadest lifestyle variable that makes people happy.

Money’s greatest intrinsic value and this can’t be overstated – is its ability to give you control over your time. To obtain, bit by bit, a level of independence and autonomy that comes from unspent assets that give you greater control over what you can do and when you can do it.

The United States is the richest nation in the history of the world. But there is little evidence that its citizens are, on average, happier today than they were in the 1950’s when wealth and income were much lower – even at the median level and adjusted for inflation.

A 2019 Gallup poll of 150,000 people in 140 countries found that about 45% of Americans felt “a lot of worry” the previous day. The global average was 39%. Fifty-five percent of Americans said they felt “a lot of stress” the previous day. For the rest of the world, 35% said the same.

Part of what’s happened here is that we’ve used our greater wealth to buy bigger and better stuff. But we’ve simultaneously given up more control over our time. At best, those things cancel each other out.

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

It’s not an easy problem to solve because everyone’s different. The first step is merely acknowledging what does, and does not, make almost everyone happy.

In his book 30 Lessons for Living, gerontologist Karl Pillemer interviewed a thousand elderly Americans looking for the most important lessons they learned from decades of life experience.

What they valued were things like quality friendships, being part of something bigger than themselves, and spending quality, unstructured time with their children. “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,” Pillemer writes.

Take it from those who have lived through everything: Controlling your time is the highest dividend money pays.

Chapter 8: Man in the Car Paradox

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.

Do not abandon the pursuit of wealth or even fancy cars.

The earlier statement is a subtle recognition that people generally aspire to be respected and admired by others, using money to buy fancy things that may bring less of it than you imagine. 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.

Chapter 9: Wealth is What You Don’t See

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

We tend to judge wealth by what we see, because that’s the information we have in front of us. We can’t see people’s bank accounts or brokerage statements. So we rely on outward appearances to gauge financial success – cars, homes, Instagram photos.

Modern capitalism makes helping people fake it until they make it a cherished industry.

But the truth is that wealth is what you don’t see.

Wealth is the nice car not purchased. The diamonds not bought. The watches not worn, the clothes forgone, and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.

That’s not how we think about wealth, because you can’t contextualize what you can’t see.

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. Someone driving a $100,000 car is almost certainly rich, because even if they purchased the car with debt, you need a certain level of income to afford the monthly payment. Same with those who live in big homes. 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. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right not.

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 the 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.

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

The world is filled with people who look modest but are actually wealth 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.

Chapter 10: Save Money

There are two important ideas to consider when saving.

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.  

Investment returns can make you rich. But whether an investing strategy will work, and how long it will work for, and whether market 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.

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

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

Everyone needs the basic. Once they’re covered there’s another level of comfortable basics, and past that there’s basics that are both comfortable, entertaining, and enlightening.

But spending beyond a pretty low level of materialism is mostly a reflection of ego approaching income, a way to spend money to show people that you have (or had) money.

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.

That flexibility and control over your time is an unseen return on wealth.

Chapter 11: Reasonable > Rational

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.

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 to maximize for how well they sleep at night.

There is, in fact, a rational reason to favour what look like irrational decisions.

Here’s one: Let me suggest that you love your investments. This is not traditional advice. It’s almost a badge of honor for investors to claim they’re emotionless about their investments, because it seems rational.

But if lacking emotions about your strategy or the stocks you own increase the odds, you’ll walk away from them when they become difficult, what looks like rational thinking becomes a liability. The reasonable investor who love their technically imperfect strategies have an edge, because they’re more likely to stick with those strategies.

There are few financial variables more correlated to performance than commitment to a strategy during its lean years – both the amount of performance and the odds of capturing it over a given period of time. The historical odds of making money in US markets are 50/50 over one-day periods, 68% in one-year periods, 88% in 10-year periods, and (so far) 100% in 20-year periods.

Chapter 12: Surprise!

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.

The most important events in historical data are the big outliers, the record-breaking events. They are what move the needle in the economy and the stock market. The Great Depression. World War II. The dot-com bubble. September 11^th. The housing crash of the mid-2000s. A handful of outlier events play an enormous role because they influence so many unrelated events in their wake.

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.

The most important economic events of the future – things that will move the needle the most – are things that history gives us little to no guide about. They will be unprecedented events. Their unprecedented nature means we won’t be prepared for them, which is part of what makes them so impactful. 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 average time between recessions has grown from about two years in the late 1800s to five years in the early 20^th century to eight years over the last half-century.

There are plenty of theories on why recessions have become less frequent. One is that the Fed is better at managing the business cycle, or at least extending it. Another is that heavy industry is more prone to boom-and-bust overproduction than the service industries that dominated the last 50 years. The pessimistic view is that we now have fewer recessions, but when they occur, they are more powerful than before. For our argument, it doesn’t particularly matter what caused the change. What matters is that things clearly changed.

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. Many investors and economists take comfort in knowing their forecasts are backed up by decades, even centuries, of data. But since economies evolve, recent history is often the best guide to the future, because it’s more likely to include important conditions that are relevant to the future.

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. General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tend to be stable in time. The history of money is useful for that kind of stuff.

But specific trends, specific trades, specific sectors, specific causal relationships about markets, and what people should do with their money are always an example of evolution in progress. Historians are not prophets.

Chapter 13: Room for Error

There is never a moment when you’re so right that you can bet every chip in front of you. The world isn’t that kind to anyone – not consistently, anyways. You must give yourself room for error. You must plan on your plan not going according to plan.

History is littered with good ideas taken too far, which are indistinguishable from bad ideas. The wisdom in having room for error is acknowledging that uncertainty, randomness, and chance – “unknowns” – are an ever-present part of life. The only way to deal with them is by increasing the gap between what you think will happen and what can happen while still leaving you capable of fighting another day.

Benjamin Graham is known for his concept of margin of safety. He wrote about it extensively and in mathematical detail. By my favourite summary of 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.

Two things cause us to avoid room for error. One is the idea that somebody must know what the future holds, driven by the uncomfortable feeling that comes from admitting the opposite.

But room for error is underappreciated and misunderstood. It’s often viewed as a conservative hedge, used by those who don’t want to take much risk or aren’t confident in their views. But when used appropriately, it’s quite the opposite.

Room for error let’s 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 favour. The biggest gains occur infrequently, either because they don’t happen often or because they take time to compound. So, the person with enough room for error in part of their strategy (cash) to let them endure hardship in another (stocks) has an edge over the person who gets wiped out, game over, insert more tokens, when they’re wrong.

There are a few specific places for investors to think about room for error.

One is volatility. Can you survive your assets declining by 30%? On a spreadsheet, maybe yes – in terms of actually paying your bills and staying cash-flow positive. But what about mentally? It is easy to underestimate what a 30% decline does to your psyche. Your confidence may become shot at the very moment opportunity is at its highest. You – or your spouse – may decide it’s time for a new plan, or new career. I know several investors who quite after loses because they were exhausted. Physically exhausted. Spreadsheets are good at telling you when the numbers do or don’t add up. They’re not good at modelling 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.

Another is saving for retirement. We can look at history and see, for example, that the US stock market has returned an annual average of 6.8% after inflation since the 1870’s. It’s a reasonable first approximation to use that as an estimate of what to expect on your own diversified portfolio when saving for retirement. You can use those assumptions to back into the amount of money you’ll need to save each month to achieve your target nest egg.

But what if future returns are lower? Or what if long-term history is a good estimate of the long-term future, but your target retirement date ends up falling in the middle of a brutal bear market, like 2009? What is a future bear market scares you out of stocks so you end up missing a future bull market, so the returns you actually earn are less than the market average? What if you need to cash out your retirement accounts in your 30s to pay for a medical mishap?

The solution is simple. Use room for error when estimating your future returns. This is more art than science. For my own investments, I assume future returns I’ll earn in my lifetime will be 1/3 lower than the historic average. So, I save more than I would if I assumed the future will resemble the past. It’s my margin of safety. The future may be worse than 1/3 lower than the past, but no margin of safety offers a 100% guarantee. A one-third buffer is enough to allow me to sleep at night. And if the future does resemble the past, I’ll be pleasantly surprised.

An important cousin of room for error is what I call optimism bias in risk-taking, or “Russian roulette should statistically work” syndrome: An attachment to favourable odds when the downside is unacceptable in any circumstances.

The idea is that you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking. The odds are in your favour when playing Russian roulette. But the downside is not worth the potential upside. There is no margin of safety that can compensate for the risk.

Same with money. The odds of many lucrative things are in your favour. Real estate prices go up most years, and during the most years you’ll get a paycheque every other week. But 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. The danger is that rational optimism most of the time masks the odds of ruin some of the time. The result is we systematically underestimate risk. Housing prices fell 30% last decade. A few companies defaulted on their debt. That’s capitalism. It happens. But those with high leverage had a double wipeout. Not only were they left broke but being wiped out erased every opportunity to get back in the game at the very moment opportunity was ripe. A homeowner wiped out in 2009 had no chance of taking advantage of cheap mortgage rates in 2010.

Room for error does more than just widen the target around what you think might happen. It also helps to protect you from things you’d never imagine, which can be the most troublesome events we face.

The biggest single point of failure with money is the sole reliance on a paycheque 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.

Chapter 14: You’ll Change

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

We should avoid the extremes of financial planning.

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. The fuel of the End of History Illusion is that people adapt to most circumstances, so the benefits of an extreme plan – the simplicity of having hardly anything, or the thrill of having almost everything – wear off. But the downsides of those extremes – not being able to afford retirement, or looking back at a life spent devoted to chasing dollars – becomes enduring regrets. Regrets are especially painful when you abandon a previous plan and feel like you have to run the other direction twice as fast to make up for lost time.

Aiming at every point in your working life, to have moderate annual savings, moderate free time, no more than a moderate commute, and at least moderate time with your family, increases the odds of being able to stick with a plan to avoid regret than if any of those things fall to the extreme sides of the spectrum.

We should also come to accept the reality of our changing minds.

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.

The trick is to accept the reality of change and move on as soon as possible.

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.

Embracing the idea that financial goals made when you were a different person should be abandoned without mercy versus put on life support and dragged on can be a good strategy to minimize future regret.

Chapter 15: Nothing’s Free

Most things are harder in practice that they are in theory. Sometimes this is because we’re overconfident. Most often it’s because we’re not good at identifying what the price of success is, which prevents us from being able to pay it.

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 tie.

The inability to recognize that investing has a price can tempt us to try to get something for nothing. Which, like shoplifting, rarely ends well.

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. And while people are generally fine with paying fees, fines are supposed to be avoided. You’re supposed to make decisions that pre-empt and avoid fines. Traffic fines and IRS fines mean you did something wrong and deserve to be punished. The natural response for anyone who watches their wealth decline and views that drop as a fine is to avoid future fines.

It sounds trivial, but 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 favour.

Chapter 16: You & Me

People make financial decisions they regret, and they often do so with scarce information and without logic. But the decisions made sense to them when they were made. Blaming bubbles on greed and stopping there misses important lessons about how and why people rationalize what in hindsight look like greedy decisions.

Part of why bubbles are hard to learn from is that they are not like cancer, where a biopsy gives us a clear warning and diagnosis. They are closer to the rise and fall of a political party, where the outcome is known in hindsight, but the cause and blame are never agreed upon.

Competition for investment returns is fierce, and someone has to own every asset at every point in tie. That means the mere idea of bubbles will always be controversial because no one wants to think they own an overvalued asset. In hindsight we’re more likely to point cynical fingers than to learn lessons.

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.

An idea exists in finance that seems innocent but has done incalculable damage.

It’s the notion that assets have one rational price in a world where investors have different goals and time horizons.

When investors have different goals and time horizons – and they do in every asset class – prices that look ridiculous to one person can make sense to another because the factors those investors pay attention to are different.

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.

What do you expect people to do when momentum creates a big short-term return potential? Sit and watch patiently? Never. That’s not how the world works. Profits will always be chased. And short-term traders operate in an area where the rules governing long-term investing – particularly around valuation – are ignored, because they’re irrelevant to the game being played.

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

It’s hard to grasp that other investors have different goals than we do because an anchor of psychology is not realizing that rational people can see the world through a different lens than your own. Rising prices persuade all investors in ways the best marketers envy. They are a drug that can turn value-conscious investors into dewy-eyed optimists, detached from their own reality by the actions of someone playing a different game than they 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 takeaway here is that few tings matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviours of people playing a different game than you are.

Chapter 17: The Seduction of Pessimism

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

But pessimism holds a special place in our hearts. Pessimism isn’t just more common that optimism. It also sounds smarter. It’s intellectually captivating and it’s paid more attention than optimism, which is often viewed as being oblivious to risk.

Before we go further, we should define what optimism is. 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 favour 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. It’s not complicated. It’s not guaranteed, either. It’s just the most reasonable bet for most people, most of the time.

When you realize how much progress humans can make during a lifetime in everything from economic growth to medical breakthroughs to stock market gains to social equality, you would think optimism would gain more attention than pessimism.

The intellectual allure of pessimism has been known for ages. John Stuart Mills wrote in the 1840’s: “I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.”

The question is why? And how does it impact how we think about money?

Let’s repeat the premise that no one is crazy. There are valid reasons why pessimism is seductive when dealing with money. It just helps to know what they ae to ensure we don’t take them too far.

Part of it is instinctual and unavoidable. Daniel Kahneman says the symmetric aversion to loss is an evolutionary shield. He writes:

“When directly compared or weighted against each other, losses loom larger than gains. This asymmetry between the power of positive and negative expectations or experiences has an evolutionary history. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.”

But a few other things make financial pessimism easy, common, and more persuasive than optimism.

1. One is that money is ubiquitous, so something bad happening tends to affect everyone and captures everyone’s attention.
2. Another is that pessimists often extrapolate present trends without accounting for how markets adapt.
3. A third is that progress happens too slowly to notice but setbacks happen too quickly to ignore.

Expecting things to be great means a best-case scenario that feels flat. Pessimism reduces expectations, narrowing the gap between possible outcomes and outcomes you feel great about.

Maybe that’s why it’s so seductive. Expecting things to be bad is the best way to be pleasantly surprised when they’re not.

Which, ironically, is something to be optimistic about.

Chapter 18: When You’ll Believe Anything

When we think about the growth of economies, businesses, investments, and careers we tend to think about tangible things – how much stuff do we have and what are we capable of?

But stories are, by far, the most powerful force in the economy. They are the fuel that can let the tangible parts of the economy work, or the brake that holds our capabilities back.

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

1. 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.
2. Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.

Most people, when confronted with something they don’t understand, don’t realize they don’t understand it because they’re able to come up with an explanation that makes sense based on their own unique perspective and experiences in the world, however limited those experiences are. We all want the complicated world we live in to make sense. So we tell ourselves stories to fill in the gaps of what are effectively blind spots.

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.

Chapter 19: All Together Now

There are universal truths in money, even if people come to different conclusions about how they want to apply those truths to their own finances.

What that caveat in place, let’s look at a few short recommendations that can help you make better decisions with your money.

Go out of your way to find humility when things are going right and forgiveness/compassion when things go wrong.

Because it’s never as good or as bad as it looks. The world is big and complex. Luck and risk are both real and hard to identify. Do so when judging both yourself and others. Respect the power of luck and risk and you’ll have a better chance of focusing on things you can actually control. You’ll also have a better chance of finding the right role models.

Less ego, more wealth.

Saving money is the gap between your ego and your income, and wealth is what you don’t see. So wealth is created by suppressing what you could buy today in order to have more stuff or more options in the future. No matter how much you earn, you will never build wealth unless you can put a lid on how much fun you have with your money right now, today.

Manage your money in a way that helps you sleep at night.

That’s different from saying you should aim to earn the highest returns or save a specific percentage of your income. Some people won’t sleep well unless they’re earning the highest returns; others will only get a good rest if they’re conservatively invested. To each their own. But the foundation of, “does this help me sleep at night?” is the best universal guidepost for all finance decisions.

If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.

Time is the most powerful force in investing. It makes little things grow big and big mistakes fade away. It can’t neutralize luck and risk, but it pushes results closer towards what people deserve.

Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune.

A small minority of things account for the majority of outcomes. No matter what you’re doing with your money you should be comfortable with a lot of stuff not working. That’s just how the world is. So you should always measure how you’ve done by looking at your full portfolio, rather than the individual investments. It is fine to have a large chunk of poor investments and a few outstanding ones. That’s usually the best-case scenario. Judging how you’ve done by focusing on individual investments makes winners look more brilliant than they were, and losers appear more regrettable than they should.

Use money to gain control over your time.

Not having control of your time is such a powerful and universal drag on happiness. The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance.

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.

Save. Just save. You don’t need a specific reason to save.

It’s great to save for a car, or a down payment, or a medical emergency. But saving for things that are impossible to predict or define is one of the best reasons to save. Everyone’s life is a continuous chain of surprises. Savings that aren’t earmarked for anything in particular is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.

Define the cost of success and be ready to pay it.

Because nothing worthwhile is free. And remember that most financial costs don’t have visible price tags. Uncertainty, doubt, and regret are common costs in the financial world. They’re often worth paying. But you have to view them as fees (a price worth paying to get something nice in exchange) rather than fines (a penalty you should avoid).

Worship room for error.

A gap between what could happen in the future and what you need to happen in the future in order to do well is what gives you endurance, and endurance is what makes compounding magic over time. Room for error often looks like a conservative hedge but if it keeps you in the game it can pay for itself many times over.

Avoid the extreme ends of financial decisions.

Everyone’s goals and desires will change over time, and the more extreme your past decisions were the more you may regret them as you evolve.

You should like risk because it pays off over time.

But you should be paranoid of ruinous risk because it prevents you from taking future risks that will pay off over time.

You should like risk because it pays off over time.

But you should be paranoid of ruinous risk because it prevents you from taking future risks that will pay off over time.

Define the game you’re playing.

Make sure your actions are not being influence 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.