Morgan Housel
The Psychology of Money
“A genius is the man who can do the average thing when everyone else around him is losing his mind.” —Napoleon (Location 24)
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He also had a relationship with money I’d describe as a mix of insecurity and childish stupidity. (Location 31)
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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. (Location 41)
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A genius who loses control of their emotions can be a financial disaster. The opposite is also true. (Location 42)
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Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence. (Location 43)
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In what other industry does someone with no college degree, no training, no background, no formal experience, and no connections massively outperform someone with the best education, the best training, and the best connections? I struggle to think of any. (Location 73)
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financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know. (Location 80)
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Two topics impact everyone, whether you are interested in them or not: health and money. (Location 90)
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Most of the reason why, I believe, is that we think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance). (Location 99)
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Finance is different. It’s guided by people’s behaviors. And how I behave might make sense to me but look crazy to you. (Location 110)
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To grasp why people bury themselves in debt you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism. To get why investors sell out at the bottom of a bear market you don’t need to study the math of expected future returns; you need to think about the agony of looking at your family and wondering if your investments are imperiling their future. (Location 112)
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Voltaire’s observation that “History never repeats itself; man always does.” (Location 115)
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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. (Location 126)
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The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty. (Location 149)
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I can read about what it was like to lose everything during the Great Depression. But I don’t have the emotional scars of those who actually experienced it. And the person who lived through it can’t fathom why someone like me could come across as complacent about things like owning stocks. (Location 150)
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As investor Michael Batnick says, “some lessons have to be experienced before they can be understood.” We are all victims, in different ways, to that truth. (Location 156)
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“Our findings suggest that individual investors’ willingness to bear risk depends on personal history.” (Location 166)
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To Gross, bonds were wealth-generating machines. To his father’s generation, who grew up with and endured higher inflation, they might be seen as wealth incinerators. (Location 171)
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Take stocks. If you were born in 1970, the S&P 500 increased almost 10-fold, adjusted for inflation, during your teens and 20s. That’s an amazing return. If you were born in 1950, the market went literally nowhere in your teens and 20s adjusted for inflation. Two groups of people, separated by chance of their birth year, go through life with a completely different view on how the stock market works: (Location 174)
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Few people make financial decisions purely with a spreadsheet. They make them at the dinner table, or in a company meeting. Places where personal history, your own unique view of the world, ego, pride, marketing, and odd incentives are scrambled together into a narrative that works for you. (Location 224)
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Dogs were domesticated 10,000 years ago and still retain some behaviors of their wild ancestors. Yet here we are, with between 20 and 50 years of experience in the modern financial system, hoping to be perfectly acclimated. (Location 255)
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Luck and risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort. (Location 262)
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“If there had been no Lakeside, there would have been no Microsoft,” (Location 284)
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When judging others, attributing success to luck makes you look jealous and mean, even if we know it exists. And when judging yourself, attributing success to luck can be too demoralizing to accept. (Location 318)
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Failure—which can be anything from bankruptcy to not meeting a personal goal—is equally abused. (Location 323)
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“The customer is always right” and “customers don’t know what they want” are both accepted business wisdom. (Location 374)
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Studying a specific person can be dangerous because we tend to study extreme examples—the billionaires, the CEOs, 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. (Location 386)
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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. (Location 390)
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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 favor. (Location 401)
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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. (Location 403)
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There is no reason to risk what you have and need for what you don’t have and don’t need. (Location 462)
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1. The hardest financial skill is getting the goalpost to stop moving. (Location 467)
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A friend of mine makes an annual pilgrimage to Las Vegas. One year he asked a dealer: What games do you play, and what casinos do you play in? The dealer, stone-cold serious, replied: “The only way to win in a Las Vegas casino is to exit as soon as you enter.” (Location 484)
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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. (Location 501)
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The amazing thing here is how big something can grow from a relatively small change in conditions. (Location 534)
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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. (Location 538)
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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. (Location 543)
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From 1950 to 1990 we gained 296 megabytes. From 1990 through today we gained 100 million megabytes. (Location 578)
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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. (Location 593)
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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. (Location 597)
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If I had to summarize money success in a single word it would be “survival.” (Location 634)
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Capitalism is hard. But part of the reason this happens is because getting money and keeping money are two different skills. (Location 638)
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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. (Location 639)
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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. This should be the cornerstone of your strategy, whether it’s in investing or your career or a business you own. (Location 649)
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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. (Location 678)
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A lot of things in business and investing work this way. 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. (Location 753)
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J.P. Morgan Asset Management once published the distribution of returns for the Russell 3000 Index—a big, broad, collection of public companies—since 1980.21 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. (Location 779)
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Napoleon’s definition of a military genius was, “The man who can do the average thing when all those around him are going crazy.” (Location 809)
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There is the old pilot quip that their jobs are “hours and hours of boredom punctuated by moments of sheer terror.” (Location 827)
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Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control. (Location 828)
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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. (Location 830)
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“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.” You can be wrong half the time and still make a fortune. (Location 869)
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The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.” (Location 875)
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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. (Location 878)
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When asked about his silence during meetings, Rockefeller often recited a poem: 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? (Location 937)
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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. Despite sitting quietly most of the day in what might have looked like free time or leisure hours to most people, he was constantly working in his mind, thinking problems through. (Location 940)
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Derek Thompson of The Atlantic once described it like this: If the operating equipment of the 21st century is a portable device, this means the modern factory is not a place at all. It is the day itself. The computer age has liberated the tools of productivity from the office. Most knowledge workers, whose laptops and smartphones are portable all-purpose media-making machines, can theoretically be as productive at 2 p.m. in the main office as at 2 a.m. in a Tokyo WeWork or at midnight on the couch.29 (Location 955)
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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.” Subconscious or not, this is how people think. 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. (Location 978)
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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. (Location 1005)
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But the truth is that wealth is what you don’t see. Wealth is the nice cars 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. (Location 1009)
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“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 (Location 1013)
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“There is no faster way to feel rich than to spend lots of money on really nice things. But the way to be rich is to spend money you have, and to not spend money you don’t have. It’s really that simple.” (Location 1017)
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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 now. (Location 1026)
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The danger here is that I think 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. (Location 1039)
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People are good at learning by imitation. But the hidden nature of wealth makes it hard to imitate others and learn from their ways. (Location 1041)
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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. (Location 1047)
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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. (Location 1101)
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saving does not require a goal of purchasing something specific. You can save just for saving’s sake. (Location 1106)
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Do not aim to be coldly rational when making financial decisions. 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. (Location 1148)
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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. (Location 1224)
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investing is effectively giving money to strangers. (Location 1234)
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“We do some things for family reasons,” Bogle told The Wall Street Journal. (Location 1245)
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If there’s one way to guard against their damage, it’s avoiding single points of failure. A good rule of thumb for a lot of things in life is that everything that can break will eventually break. So if many things rely on one thing working, and that thing breaks, you are counting the days to catastrophe. That’s a single point of failure. (Location 1512)
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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. (Location 1518)
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And the truth is, few of us do. It’s hard to make enduring long-term decisions when your view of what you’ll want in the future is likely to shift. (Location 1554)
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Munger says the first rule of compounding is to never interrupt it unnecessarily. (Location 1565)
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Carl Richards writes: “Risk is what’s left over when you think you’ve thought of everything.” (Location 2081)
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you should always measure how you’ve done by looking at your full portfolio, rather than 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. (Location 2165)
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Use money to gain control over your time, (Location 2167)
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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. (Location 2168)
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No one is impressed with your possessions as much as you are. (Location 2170)
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Save. Just save. You don’t need a specific reason to save. (Location 2172)
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saving for things that are impossible to predict or define is one of the best reasons to save. (Location 2173)
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Define the cost of success and be ready to pay it. Because nothing worthwhile is free. (Location 2175)
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endurance is what makes compounding magic over time. (Location 2180)
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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 This might seem atrocious, and surely the statistic uncovers some hypocrisy. (Location 2194)
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Charlie Munger once said “I did not intend to get rich. I just wanted to get independent.” (Location 2211)
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All lifestyles exist on a spectrum, and what is decent to one person can feel like royalty or poverty to another. (Location 2227)
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Nassim Taleb explained: “True success is exiting some rat race to modulate one’s activities for peace of mind.” (Location 2241)
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I don’t have anything against actively picking stocks, either on your own or through giving your money to an active fund manager. I think some people can outperform the market averages—it’s just very hard, and harder than most people think. (Location 2264)
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I think for most investors, dollar-cost averaging into a low-cost index fund will provide the highest odds of long-term success. (Location 2267)
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Beating the market should be hard; the odds of success should be low. If they weren’t, everyone would do it, and if everyone did it there would be no opportunity. So no one should be surprised that the majority of those trying to beat the market fail to do so. (Location 2271)
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(The statistics show 85% of large-cap active managers didn’t beat the S&P 500 over the decade ending 2019.)71 (Location 2273)
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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. (Location 2508)
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