Some excerpts and notes from reading "The Psychology of Money: Timeless lessons on wealth, greed, and happiness"
Knowing is not the same as doing
Financial success is not a hard science, but a soft skill - how you do it is more important than how much knowledge you have.
An individual investor's willingness to take risks depends on early personal experiences. What determines the outcome in investing is not intelligence, not education or experience, but the time and place where a person is born - purely luck factors.
Survival first
Getting rich requires a spirit of adventure, an optimistic attitude, and the courage to let go. But what needs to be done to keep wealth is completely opposite to adventure. Keeping wealth requires humility and awe, a clear understanding of how quickly wealth comes and how easily it goes. Keeping wealth requires frugality and acknowledging that part of the wealth you have comes from luck, so don't expect to replicate past successes indefinitely.
Survival should be the basis of all your strategies.
- No return is worth the risk of losing everything.
- You can only take advantage of the value of compound interest if you survive.
Tail events
Tail events have a huge impact in these areas. These low-frequency, high-impact minority events become the main factors determining the outcome.
"What matters is not whether you are right or wrong," "financial tycoon" George Soros once said, "but how much you can make when you are right, or how much you will lose when you are wrong." Even if you are wrong half the time, you can still win in the end.
Money and time
The greatest intrinsic value of money is that it gives you the ability to control your own time - there is no exaggeration in this statement. The reason why you can gradually gain a certain degree of independence and autonomy from the process of wealth accumulation is that the wealth you accumulate gives you stronger control over what you can do and when you can do it.
If you don't have much control over time, you have to accept opportunities that are not good enough, but if you have enough time, you can wait for better opportunities to come.
Facing the unexpected
The truth you should learn from unexpected events is: unexpected things happen every day. We should not take past events as a guide to future possibilities; in the face of unexpected events, we should acknowledge this - we know nothing about what will happen in the future.
In the face of the unexpected, safety margins need to be set. The purpose of the safety margin is to make prediction unnecessary.
If something has a 95% chance of success, the remaining 5% failure rate means that at some point in your life, you will definitely encounter failure.
Save money. Just save. Saving money doesn't need any specific reason. It's a good thing to save for a car, a down payment, or a sudden illness, but one of the best reasons to save is for those unpredictable or undefined things. Everyone's life is made up of a series of surprises. In the worst moments of life, a substantial savings without a specific purpose can provide a hedge for the inevitable surprises.
The cost of investment
The success of investment requires investors to pay a corresponding price, but the measure of this price is not money, but volatility, fear, doubt, uncertainty, and regret - these costs are easily overlooked by you if you are not the one facing them directly.
Almost all volatility is a cost, not a penalty.
Most of the costs to be paid in finance are unpriced. Uncertainty, doubt, and regret are common costs in the financial world. They are usually worth your bill, but you should see them as a cost (to be paid for good things), not a penalty (to be avoided at all costs).
Choices vary from person to person
When a commentator on CNBC tells you "you should buy this stock," remember that they don't know who you are. Are you a teenager who plays stocks as a game, an elderly person with a limited budget who has lost a spouse, or a hedge fund manager who wants to boost performance before the end of the quarter? Should we think that these three people have the same priority in thinking and believe that the trading price of a stock, no matter how high, is reasonable for each of them?
The temptation of pessimistic attention
If a person who has always been smart tells me that the price of the stock he chose will increase 10 times next year, I will consider it a dream without hesitation. But if a person who is always confused tells me that the price of a stock I hold will plummet because the company is exposed to fraudulent accounting, I will put down all my work and listen carefully to every word he says.
Progress happens too slowly to be noticed, but setbacks happen too quickly to be ignored.
According to data from the National Institute of Health, since 1965, the age-specific death rate from heart disease in the United States has dropped by more than 70%. A 70% drop means that 500,000 lives are saved each year. Compare this with the population of some big cities to get a sense of how many lives are saved each year. But because this process progresses slowly, it attracts less attention than the losses caused by sudden events such as terrorist attacks, plane crashes, or natural disasters. Even if the United States were to experience 5 Katrina hurricanes a week - imagine how much attention that would attract - the total number of deaths in a year would not offset the number of lives saved each year behind the 70% drop over the past half-century.
Author's philosophy
Be humble when things are going in the right direction; be understanding or sympathetic when things are going in the wrong direction. This is because nothing is as good or bad as it seems. The world is big and complex. Luck and risk are real and hard to discern, so keep this in mind whether you're evaluating yourself or others. If you can respect the power of luck and risk, you're more likely to focus on what you can really control and find the right reference points.
For most investors, dollar-cost averaging into low-cost index funds will be the highest probability of long-term investment success.
In the field of investment, there is almost no relationship between effort and results. This is because the world is driven by tail events - a few variables are the source of most returns. No matter how hard you invest, as long as you miss two or three opportunities that can completely turn the situation around, your returns won't be too outstanding. But on the other hand, as long as you're lucky and seize these opportunities, even if you don't invest seriously at ordinary times, you can easily get rich. As long as you grasp a few key points that are crucial to the success of your strategy, even the simplest investment strategy will work.
High savings rate, patience, and an optimistic attitude that the global economy will continue to create value over the next few decades.