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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.
The second is that you’re therefore doing yourself harm by not taking actions that fully exploit an accurate view of that future coming true.
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.
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 danger is that rational optimism most of the time masks the odds of ruin some of the time.
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.
Charlie Munger says the first rule of compounding is to never interrupt it unnecessarily.
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.
But the downsides of those extremes—not being able to afford retirement, or looking back at a life spent devoted to chasing dollars—become enduring regrets.
Regrets are especially painful when you abandon a previous plan and feel like you have to run in the other direction twice as fast to make up for lost time.
Compounding works best when you can give a plan years or decades to grow. This is true for not only savings but careers a...
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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 f...
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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 and avoid regret than i...
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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. The quicker it’s done, the sooner you can get back to compounding.
Including dividends the Dow Jones Industrial Average returned about 11% per year from 1950 to 2019, which is great. But the price of success during this period was dreadfully high. The shaded lines in the chart show when it was at least 5% below its previous all-time high. This is the price of market returns. The fee. It is the cost of admission. And it hurts.
The response of our business leaders to the crises was typical of the GE culture. Even though the books had closed on the quarter, many immediately offered to pitch in to cover the [earnings] gap. Some said they could find an extra $10 million, $20 million, and even $30 million from their business to offset the surprise.
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?
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 IMPLOSION OF the dot-com bubble in the early 2000s reduced household wealth by $6.2 trillion.
Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long term to mostly short term.
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.
So much consumer spending, particularly in developed countries, is socially driven: subtly influenced by people you admire, and done because you subtly want people to admire you.
A young lawyer aiming to be a partner at a prestigious law firm might need to maintain an appearance that I, a writer who can work in sweatpants, have no need for. But when his purchases set my own expectations, I’m wandering down a path of potential disappointment because I’m spending the money without the career boost he’s getting. We might not even have different styles. We’re just playing a different game.
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.
Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.
problems correct and people adapt. Threats incentivize solutions in equal magnitude.
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.
The short sting of pessimism prevails while the powerful pull of optimism goes unnoticed.
The bigger the gap between what you want to be true and what you need to be true to have an acceptable outcome, the more you are protecting yourself from falling victim to an appealing financial fiction.
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.
“Risk is what’s left over when you think you’ve thought of everything.”
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. So we cling to stories about outcomes being in our control.
A doctor may throw the kitchen sink at her patient’s cancer, but choose palliative care for herself.
achieving some level of independence does not rely on earning a doctor’s income. It’s mostly a matter of keeping your expectations in check and living below your means.
If there’s a part of our household financial plan I’m proud of it’s that we got the goalpost of lifestyle desires to stop moving at a young age.
“The first rule of compounding is to never interrupt it unnecessarily.”
