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Introduction: The Greatest Show On Earth

Finance is overwhelmingly taught as a math-based field, where you put data into a formula and the formula tells you what to do, and it’s assumed that you’ll just go do it. This is true in personal finance, where you’re told to have a six-month emergency fund and save 10 % of your salary. It’s true in investing, where we know the exact historical correlations between interest rates and valuations. And it’s true in corporate finance, where CFOs can measure the precise cost of capital. It’s not that any of these things are bad or wrong. It’s that knowing what to do tells you nothing about what happens in your head when you try to do it.

Physics isn’t controversial. It’s guided by laws. Finance is different. It’s guided by people’s behaviors.

No One’s Crazy

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.

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 economists found that people’s lifetime investment decisions are heavily anchored to the experiences those investors had in their own generation — especially experiences early in their adult life.

The economists wrote: “Our findings suggest that individual investors’ willingness to bear risk depends on personal history.”[1]

Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.

Money has been around a long time. King Alyattes of Lydia, now part of Turkey, is thought to have created the first official currency in 600 BC. But the modern foundation of money decisions — saving and investing — is based around concepts that are practically infants.

Take retirement. At the end of 2018 there was $ 27 trillion in U.S. retirement accounts, making it the main driver of the common investor’s saving and investing decisions. But the entire concept of being entitled to retirement is, at most, two generations old. It should surprise no one that many of us are bad at saving and investing for retirement. We’re not crazy. We’re all just newbies. Same goes for college.

Same for index funds, which are less than 50 years old. And hedge funds, which didn’t take off until the last 25 years. Even widespread use of consumer debt — mortgages, credit cards and car loans — did not take off until after World War II, when the GI Bill made it easier for millions of Americans to borrow.

Luck & Risk

NYU professor Scott Galloway has a related idea that is so important to remember when judging success — both your own and others’: “Nothing is as good or as bad as it seems.”[2]

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.

Years ago, I asked economist Robert Shiller, who won the Nobel Prize in economics, “What do you want to know about investing that we can’t know?” “The exact role of luck in successful outcomes,” he answered.[3]

The line between “inspiringly bold” and “foolishly reckless” can be a millimeter thick and only visible with hindsight. 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.

Bill Gates once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”[4]

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.

Never Enough

For a critical element of our society, including many of the wealthiest and most powerful among us, there seems to be no limit today on what enough entails.

Rajat Gupta wanted to be a billionaire. In 2008, as Goldman Sachs stared at the wrath of the financial crisis, Warren Buffett planned to invest $ 5 billion into the bank to help it survive. Sixteen seconds after learning of the pending deal Gupta, who was dialed into the Goldman board meeting, hung up the phone and called a hedge fund manager named Raj Rajaratnam. Gupta and Rajaratnam both went to prison for insider trading, their careers and reputations irrevocably ruined.

The question we should ask of both Gupta and Madoff is why someone worth hundreds of millions of dollars would be so desperate for more money that they risked everything in pursuit of even more. They had no sense of enough.

To make money they didn’t have and didn’t need, they risked what they did have and did need. There is no reason to risk what you have and need for what you don’t have and don’t need.

Happiness, as it’s said, is just results minus expectations.

Confounding Compounding

The big takeaway from ice ages is that you don’t need tremendous force to create tremendous results. 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. And so, it is with money.

The danger here is that when compounding isn’t intuitive, we often ignore its potential and focus on solving problems through other means. Not because we’re overthinking, but because we rarely stop to consider compounding potential.

None of the 2.000 books picking apart Buffett’s success are titled This Guy Has Been Investing Consistently for Three-Quarters of a Century. But we know that’s the key to the majority of his success.

Getting Wealthy vs. Staying Wealthy

Jesse Livermore was the greatest stock market trader of his day. Born in 1877, he became a professional trader before most people knew you could do such a thing. In a stroke of genius and luck, he had been short the market, betting stocks would decline. During one of the worst months in the history of the stock market he became one of the richest men in the world.

Abraham Germansky was a multimillionaire real estate developer who made a fortune during the roaring 1920s. The October 1929 crash made Jesse Livermore one of the richest men in the world. It ruined Abraham Germansky, perhaps taking his life.

After his 1929 blowout Livermore, overflowing with confidence, made larger and larger bets. He wound up far over his head, in increasing amounts of debt, and eventually lost everything in the stock market.

The timing was different, but Germansky and Livermore shared a character trait: They were both very good at getting wealthy, and equally bad at staying wealthy.

Not “growth” or “brains” or “insight”. The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. Compounding only works if you can give an asset years and years to grow.

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

Conservative is avoiding a certain level of risk. Margin of safety is raising the odds of success at a given level of risk by increasing your chances of survival.

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.

Tails, You Win

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.

Anything that is huge, profitable, famous or influential is the result of a tail event — an outlying one-in-thousands or millions event.

Investment firm Correlation Ventures once crunched the numbers. Out of more than 21,000 venture financings from 2004 to 2014: 65 % lost money. Two and a half percent of investments made 10x – 20x. One percent made more than a 20x return. Half a percent — about 100 companies out of 21,000 — earned 50x or more. That’s where the majority of the industry’s returns come from.

J.P. Morgan Asset Management once published the distribution of returns for the Russell 3000 Index — a big, broad, collection of public companies — since 1980. Forty percent of all Russell 3000 stock components lost at least 70 % of their value and never recovered over this period. Effectively all of the index’s overall returns came from 7 % of component companies that outperformed by at least two standard deviations.

“It’s not whether you’re right or wrong that’s important,” George Soros once said, “but how much money you make when you’re right and how much you lose when you’re wrong.”[5] You can be wrong half the time and still make a fortune.


Angus Campbell was a psychologist at the University of Michigan. The most powerful common denominator of happiness was simple. 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.

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

A wise old owl lived in an oak, The more he saw the less he spoke, The less he spoke, the more he heard, Why aren’t we all like that wise old bird?

Controlling your time is the highest dividend money pays.

Man in the Car Paradox

There is a paradox here: 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.

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

We should be careful to define the difference between wealthy and rich. Rich is a current income. But wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. 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.

Save Money

Past a certain level of income people fall into three groups: Those who save, those who don’t think they can save, and those who don’t think they need to save.

The United States uses 60 % less energy per dollar of GDP today than it did in 1950.

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.

Think of it like this, and one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.

Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you.

If you have flexibility you can wait for good opportunities, both in your career and for your investments. You’ll have a better chance of being able to learn a new skill when it’s necessary.

Having more control over your time and options is becoming one of the most valuable currencies in the world. That’s why more people can, and more people should, save money.

Reasonable > Rational

Fever is almost universally seen as a bad thing. They’re treated with drugs like Tylenol to reduce them as quickly as they appear. Despite millions of years of evolution as a defense mechanism, no parent, no patient, few doctors, and certainly no drug company views fever as anything but a misfortune that should be eliminated.

It may be rational to want a fever if you have an infection. But it’s not reasonable. That philosophy — aiming to be reasonable instead of rational — is one more people should consider when making decisions with their money.

Harry Markowitz won the Nobel Prize for exploring the mathematical tradeoff between risk and return.

Investing has a social component that’s often ignored when viewed through a strictly financial lens. My own view is that people are neither rational nor irrational. We are human.

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

The historical odds of making money in U.S. 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. Anything that keeps you in the game has a quantifiable advantage.


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.[6]

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.

Richard Feynman, the great physicist, once said, “Imagine how much harder physics would be if electrons had feelings.”[7]

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 correct lesson to learn from surprises is that the world is surprising.

Graham’s classic book, The Intelligent Investor, is more than theory. It gives practical directions like formulas investors can use to make smart investing decisions.

But something becomes clear when you try applying some of these formulas: few of them actually work.

Room for Error

A blackjack card counter knows they are playing a game of odds, not certainties.

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.

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.

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 .

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 favor 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.

You’ll Change

An underpinning of psychology is that people are poor forecasters of their future selves. Imagining a goal is easy and fun. Imagining a goal in the context of the realistic life stresses that grow with competitive pursuits is something entirely different. This has a big impact on our ability to plan for future financial goals.

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.

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. And when you consider our tendency to change who we are over time, balance at every point in your life becomes a strategy to avoid future regret and encourage endurance.

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.

Nothing’s Free

Every job looks easy when you’re not the one doing it because 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. Sometimes this is because we’re overconfident. More 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 time.

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 favor.

The volatility/uncertainty fee — the price of returns — is the cost of admission to get returns greater than low – fee parks like cash and bonds.

Find the price, then pay it.

You & Me

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.

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.

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. The main thing I can recommend is going out of your way to identify what game you’re playing.

The Seduction of Pessimism

Pessimism isn’t just more common than 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.

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.

Kahneman says the asymmetric aversion to loss is an evolutionary shield.

Only 2.5 % of Americans owned stocks on the eve of the great crash of 1929 that sparked the Great Depression. But the majority of Americans — if not the world — watched in amazement as the market collapsed, wondering what it signaled about their own fate.

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

In 2008 environmentalist Lester Brown wrote: “By 2030 China would need 98 million barrels of oil a day. The world is currently producing 85 million barrels a day and may never produce much more than that. There go the world’s oil reserves.”[8]

There is an iron law in economics: extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways.

Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.

When You’ll Believe Anything

In 2007, we told a story about the stability of housing prices, the prudence of bankers, and the ability of financial markets to accurately price risk. In 2009 we stopped believing that story. That’s the only thing that changed. But it made all the difference in the world.

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.

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”.

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.

Part of the reason forecasting the stock market and the economy is so hard is because you are the only person in the world who thinks the world operates the way you do.

Wanting to believe we are in control is an emotional itch that needs to be scratched, rather than an analytical problem to be calculated and solved. The illusion of control is more persuasive than the reality of uncertainty.

All Together Now

Respect the power of luck and risk and you’ll have a better chance of focusing on things you can actually control.

Saving money is the gap between your ego and your income, and wealth is what you don’t see.

Time is the most powerful force in investing. It makes little things grow big and big mistakes fade away.

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.

Uncertainty, doubt, and regret are common costs in the finance world. They’re often worth paying.

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

The answer to the question, “What are all these GIs going to do after the war?” was now obvious. They were going to buy stuff, with money earned from their jobs making new stuff, helped by cheap borrowed money to buy even more stuff.

The defining characteristic of economics in the 1950s is that the country got rich by making the poor less poor.

This was important. People measure their well-being against their peers. And for most of the 1945 – 1980 period, people had a lot of what looked like peers to compare themselves to.

Household debt increased fivefold from 1947 to 1957 due to the combination of the new consumption culture, new debt products, and interest rates subsidized by government programs, and held low by the Federal Reserve. But income growth was so strong during this period that the impact on households wasn’t severe.

A lot of debt was shed after 2008. And then interest rates plunged. Household debt payments as a percentage of income are now at the lowest levels in 35 years.

But they’re symptomatic of the bigger thing that’s happened since the early 1980s: The economy works better for some people than others. Success isn’t as meritocratic as it used to be and, when success is granted, it’s rewarded with higher gains than in previous eras.

Benedict Evans says, “The more the Internet exposes people to new points of view, the angrier people get that the different views exist.”[9]

[1] In the book on page 14

[2] In the book on page 23

[3] In the book on page 25

[4] In the book on page 30

[5] In the book on page 63

[6] In the book on page 93

[7] In the book on page 93

[8] In the book on page 135

[9] In the book on page 175

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