No one can accurately predict the market. No one can see it happen, only explain it away after it has happened.
The economy is not like engineering, physics is guided by laws that we understand and can measure, the economy is guided by people and behaviours which is much harder to predict.
You have experienced very little in your life, no matter how old you are, yet you use your experience to guide what you do financially.
Our individual risk tolerance is based on our financial experience. If you have made money easily in the market before, you are much more likely to take large risks. The opposite is true, consider those who lived through the great depression.
We are not good at judging risk
We are quick to notch our wins up to skill, and our losses to poor luck.
Being reckless and right is dangerous, it may lead to us being reckless and wrong in the future.
Bill Gates: “Success is a lousy teacher. It seduces smart people into thinking they can’t lose”.
Not all success is due to hard work and skill, and not all failure is due to laziness and stupidity.
How to handle with inevitable failures
Never risk what you need and have for what you don’t need and don’t have.
Failing is inevitable, how much you lose when you fail is important to consider. The higher the risk, the more likely you are to fail.
Yesterdays success is not guarantee of tomorrow’s fortunes.
Leaving room for error allows you to weather mistakes or market crashes, allowing you to stay in the game longer. This allows compounding to work.
Leveraging can turn a minor mistake into financial ruin.
The more variables that have to go right in order for your strategy to succeed, the more fragile it is.
Think of market volatility as a ‘fee’. This thinking will help you stick around for the long term.
What is enough?
Comparing yourself to others ‘keeping up with the Jones’, social comparison, is a never-ending struggle.
Capitalism is a professional at two things, generating wealth and envy.
Knowing when you have enough is realising that constantly trying to get more will make you miserable.
Wealth is income not spent. Buying expensive clothes, cars, houses, etc, is not wealth, it is waste.
Wealth gives you options. Wealth gives you the option to invest in something good when everyone else is broke.
The secret is time and avoiding ruin
Charlie Monger said, ‘Compounding is a wonderful thing and should not be interrupted unnecessarily’.
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.
It is through compounding using modest gains that great wealth can be made. Good returns left to compound uninterrupted leads to wealth.
Tails drive everything
Most ideas fail. Jeff Bezos at Amazon has had many failures, but the winners have driven Amazon to be one of the biggest companies in the world.
Venture capital works with tails. They lose money on 9/10 investments, but that 1/10 makes them rich.
Saving
Every time you save your money you’re taking a point in the future that would be owned by someone else and giving it to yourself.
Unless you can decrease what you need and want now, and be happy, you’ll never earn enough. The trick with saving is being happy on as little as you can, so you can save as much as possible.
Save money to gain control over your time. Money gives you options.
Nassim Taleb explained: “True success is exiting some rat race to modulate one’s activities for peace of mind.”
Investing
No one can predict the future. Scott Sagan said “things that have never happened before happy all the time”.
Experience leads to overconfidence, not improved forcasting ability.
Historians are not prophets.
Understand your own time horizon, and don’t be influenced by others who are playing a different game (i.e. funds).
Investing / Financial media get more clicks with sensational headlines. Things are rarely as good or as bad as they make out.
The more you want something to be true, the more likley you’re going to believe a story that confirms your bias.