Have you heard the story about Ronald Reed? The janitor that had 8 million dollars in savings when he died in 2014? Yeah, you heard that right. 8 million dollars. And he didn't win the lottery or inherit the money either.
He just saved consistently throughout his life, while letting the wonders of compounding do its thing. The moral is that your behavior with money is oftentimes more important than how intelligent you are. Even if you don't have a diploma from Harvard or work on Wall Street, you can become rich by just behaving in a sound way.
As Morgan Housel puts it,"...financial success is not a hard science. It's a soft skill where how you behave is more important than what you know." Spend your next 10-15 minutes on this video and you might excel on the soft skill of investing. This is a top 5 takeaway summary of The Psychology of Money by Morgan Housel. And this is The Swedish Investor, bringing you the best tips and tools for reaching financial freedom through stock market investing. Takeaway number 1. Pay the price.
Let's say that you want a new nice watch. You go to the store to check out the offerings. You are really after something that will impress your friends and the lovely lady that you're dating.
You now have a choice. Either you pay for the watch, or you steal it and run, because you have done your cardio, right? My guess is that you would choose option number one, no matter your physical capacity.
You would take out your card and swipe that thing, do the right thing. The point is that you know that having a new watch comes with a price. A fee. And it's the same with investing. It comes with a price too.
Throughout the videos on this channel, there are some reoccurring takeaways for high returns, one of them being a somewhat concentrated portfolio, with Peter Lynch perhaps being the exception. The concentrated portfolio brings with it a characteristic to your performance. It will be volatile.
This is the price, the fee, for having high returns in the stock market over the long term. If you don't have the stomach to stay the course when your net worth decreases by, say, 20% during a single week, as two of your major holdings report quarterly earnings below what analysts expected, don't aim to maximize your returns, because the higher the returns, the higher this fee typically is. Let's say you already 10 years ago could visualize Netflix's bright future.
You invested a large portion of your net worth in the stock. Well, you would be quite a rich person today. However, could you afford paying the price for this journey? Netflix has, during this period, had many major downturns.
Would you have sat still in that boat during 2011, for example, when Netflix lost tons of customers and the stock price fell 80% from its peak during the ensuing months? Your portfolio returns were would look terrible. What would you tell your spouse and your kids? Could you stomach facing them, knowing that you might have endangered their future? Would you still think that being almost all-in Netflix is a good idea?
This is of course an extreme example, but even if you have something less extreme than an all-in Netflix approach to investing, you'll have to pay the price of volatility nonetheless. Let's say that you bought an S&P 500 index fund in 1980. You'd still have to face about 13 years combined when your investment portfolio was down 20% from its high, and about 8 months when it was down 50%. That's tough! Stock market investing is a great thing that enables wealth creation like few other options. But don't try to fool yourself.
It doesn't come for free. All investors will experience volatility and you have to look at this as the price you pay for a brighter future. Takeaway number 2. Never enough.
It's a very interesting phenomenon that you can hand somebody a $2 million bonus and they're fine until they find out that the person next to them got $2.1 million and then they're you know, they're sick for the next year. Capitalism is great at doing two things, generating wealth and generating envy. The urge to surpass your neighbors, peers and friends can help energize your hard work and strive to really make it.
And, of course, being motivated into becoming more productive and doing meaningful work is a good thing, but social comparison can also cause us to feel like we're never enough. Let's look at some statistics. To belong to the top 1% highest income earners in the US, you'd have to earn somewhere around $500,000 a year.
That's what a highly specialized doctor, let's call him Bill, earns, and by almost any standard, Bill would be considered rich. He can afford to drive nice cars, go on long vacations to exotic countries, perhaps hire someone to do work which he thinks is tedious, etc. Bill? has been feeling good about himself and what he has achieved financially in his life.
Well, that was only until he bought a vacation home in the Hamptons and realized that he had Stan as his neighbor. Stan belongs to the top 1% of the 1%. He is a CEO of quite a large public company and earns a staggering $10 million per year. Now, You'd hope that at least Stan would be satisfied with his financial achievements, but nope!
This guy was a childhood friend of Michael Morgan, and this all-time great basketball player is someone who belongs to the 1% of the 1% of the 1%, and well, compared to Michael's fortune of about $2 billion, Stan's yearly salary of $10 million suddenly seems like peanuts. Does it end here? Well, no, it doesn't. Because Michael occasionally attends parties with celebrities where a guy named Jeff Bezos shows up. Bezos is the top 1% of the 1% of the 1% of the 1% and he increased his net worth by about 75 billion in 2020, now sitting at something like 200 billion dollars.
There's always a bigger fish. The type of envy which has emerged from comparisons of this kind has caused a lot of people to do foolish things throughout history. Some have leveraged their portfolios to the teeth in order to move up to a higher pyramid, just to lose it all and then commit suicide. Some have acted on insider information and lost both personal reputation and then later their freedom when they've gone to jail. Many have forsaken their families and then had their partners leaving them or cheating on them, or both, as a result.
By watching this channel and learning on how to become a successful investor, chances are that you will at some point reach a level of financial freedom that the average Joe can only dream about. But you need to, at some point, accept that enough is enough. We will not trade something that we have and need for something that we don't have and don't need even if we kind of like to have it.
Takeaway number three. Crazy is in the eye of the beholder. At a first glance, it seems like a lot of people do crazy things with their money. Some spend it in ridiculous amounts on ridiculous items, and others hide it under their mattresses. But the thing to remember is that people come from different backgrounds, with different childhoods, different parents, different life experiences and different educations.
All this adds up to different perspectives, and different values. What seems crazy to you might make total sense for me. Morgan uses the example of lottery tickets in the book.
The lowest income households in the US spends more than $400 per year on the lottery. This is 4 times more than the average in the highest income group. Combine this with the fact that more than a third of Americans cannot come up with $400 for an emergency. Do these people spend their emergency buffer on lottery tickets?
Seems crazy, doesn't it? But again, we do not have the same perspective as these individuals. Try to see it from their perspective. They live paycheck to paycheck, with little room to save money. They often lack education, and thus they also lack a nice career trajectory.
They can't afford a nice vacation or a new car, and they can't put their children through college, without a mountain of debt. Buying a lottery ticket is their way of buying into the dream that many of us already live. That is why they buy more lottery tickets than we do. Not so crazy after all, perhaps. So, how does this make you a better investor?
For one thing, by acknowledging that we are different, we become less tempted to copy an investment portfolio or strategy which doesn't suit our own goals. For example, our risk profile might be higher than that of a billionaire's, as our focus is more on the getting rich part and not so much about staying rich. Copying the billionaire's portfolio might be suboptimal for your goals, Acknowledging differences can also help us to say no more easily to investments that are outside our own circle of competence. Take GameStop for example.
As I am not a trader, I didn't participate in this drama at all. It's simply not my card to play. Understanding different people's perspectives, or at least that there are different lenses to see the world through, will help you make better sense of our society and lead you on the path that is yours. Takeaway number 4. Peek-a-boo!
What does the Great Depression, World War II, the financial crisis and COVID-19 all have in common? They were all events which shaped our society, they had huge impacts on the financial markets and they were pretty much impossible to foresee. Nassim Taleb, who is one of my favorite authors, would refer to these events as Black Swans. The definition of a Black Swan is that 1. It's an outlier Nothing that has happened before can convincingly point to even the possibility of the event 2. It carries an extreme impact 3. It becomes explainable only after the fact Human nature fools us into believing that we should have been able to know it would happen all along Imagine it is Black Monday, 1987. How would you have reacted to the market losing almost one fourth of its value in a single day? Would you have been one of the individuals that shouted, SELL!
SELL! Or, would you have been able to weather the storm, perhaps putting in additional chips which you've kept on the sidelines? Here's an interesting fact.
If you invested in the S&P 500 index 20 years ago, but you missed out on the 4 best performing stock market days, you'd have a 164% return instead of 291%. That's quite a big difference. The moral of this takeaway is that it's more useful to prepare yourself, both mentally and financially, for a disaster which you cannot foresee, than hoping that you're able to react before everyone else.
Stop listening to macro projections. The things that will cause big fear among the investment community in the future are the things that are unlikely to be foreseen anyways. Takeaway number 5. The seduction of pessimism If I were to give you a bunch of reasons to why the market will crash later this year, mentioning the gigantic US governmental debt, that stimulus checks may lead to the return of inflation, and perhaps something about a new strain of COVID-19, You would most likely be intrigued, and perhaps end up with quite a negative view of where in the market cycle that we are at the moment. Where I instead to give you examples of why things probably will continue to get better, by showing how life expectancy is rising, how sustainable energy is getting cheaper, or how computing power is exploding, you would most likely shrug your shoulders and not think twice about it.
We all know that the pessimistic person sounds so very intelligent and the optimist sounds naive in comparison. Why is that? Daniel Kahneman, the author of Thinking Fast and Slow, says that asymmetry towards loss and listening to pessimists is an evolutionary trait.
When directly compared or weighted against each other, losses loom larger than gains. Organisms that treated threats as more urgent than opportunities and have a better chance to survive and reproduce. We tend to listen to pessimists more carefully not only for evolutionary reasons, but also because progress happens much slower than setbacks do.
Progress rarely happens overnight, but setbacks often do. Because tragedies and setbacks happen during much shorter time periods, it's much easier to create an intriguing and persuading story around it, and thus it receives more attention. To create an optimistic story about the future, we must look at longer time horizons. This often becomes more vague and less dramatic. Knowing that you will perhaps be more fascinated by a pessimist and less so by an optimist can perhaps help you becoming less asymmetric towards this in the future.
The world is better than you think, as Sweden's Hans Rosling would have said. So, You are not going to get rich in the stock market without paying the price of volatility. Envy is the worst of the seven deadly sins.
Never risk what you have and need for what you don't have and don't need. Different perspectives cause different courses of action to become reasonable or rational. Instead of trying to foresee disasters, prepare yourself mentally and financially so that you can survive them.
And be careful when taking investment advice. Understand that pessimism appeals more to your survival instincts than optimism does. That was it for today, but that was not it from Morgan Housel. Check out his book, It's a Real Gem.
Here's a suggestion on what you can watch next if you want to understand more about human psychology and its relation to money. Cheers!