Psychology of Money contains 20 lessons for investors and how our psychology affects our investment decisions. Chapter 19 has a good summary of each chapter. In the last chapter, the author shares his own investment strategy:
For most investors, dollar-cost averaging into a low-cost index fund will provide the highest odds of long-term success… We invest money from every paycheck into these index funds - a combination of U.S. and international stocks.
This is very common advice these days, also what I use for my own investments. Here are some other takeaways from the book:
- The generation you were born in and the economic conditions of that period (high inflation or booming economy) shape your worldview about investing.
- Not all success is due to hard work, and not all poverty is due to laziness.
- Even if the odds are low, don’t take risks that can result in losing everything (like playing a game of Russian roulette)
- Good investing isn’t 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.
- Tail events (an outlier) are responsible for the majority of returns.
- It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much money you lose when you’re wrong (taking asymmetric risks).
- The highest form of wealth is the ability to wake up every morning and say “I can do whatever I want today.” Having a strong sense of controlling one’s life is the most dependable predictor of positive feelings of wellbeing. Use money to gain control over your time.
- You might think you want an expensive car, a fancy watch, and a huge house. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does - especially from the people you want to respect and admire you.
- If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.
Overall, enjoyable read, my main criticism would be that the advice is more around high-level strategy and less about specific actionable tactics around investing.
To end this post, here’s a fun story from the book that I’ve read before:
At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, “Yes, but I have something he will never have … enough.
