There is no strict science about how to successfully invest money. Investing is a soft skill and it depends more on personal behavior than on your knowledge. The mathematical and strategic aspects of investing are less addressed. Rather, it is about the human side, about thinking and acting in connection with monetary issues. The book is full of interesting insights and each of the 18 chapters would be worth discussing separately here.
Luck and risk
The world is too complex for results to be determined solely by one’s actions. Housel describes luck and risk as siblings and both have a significant influence on what happens in the world. The difficulty is that these two factors are not that easy to measure. Instead, we like to attribute our success to our competence and our failure to bad luck. With others, we do it the other way around. If we orientate ourselves towards other people, we should pay particular attention to always orientate ourselves towards the broadest possible and generally valid patterns. Because the more general a pattern is, the easier it is to apply it to one’s own life. On the other hand, the more extreme the results of individual people, positive as well as negative, the less they apply to one’s own life due to their complexity and uniqueness. But that’s exactly what we do when we try to mimic extreme investment results from individual investors to learn from the best.
Time as a success factor
Exceptional investor Warren Buffett achieved an average annual return of 22%. His net worth is currently $ 85.6 billion. Hedge fund manager and mathematician Jim Simons, on the other hand, achieved an average return of no less than 66%. However, his net worth is $ 23 billion. Why is Buffet’s net worth so much bigger?
Time is an essential factor. Buffet was able to build his fortune essentially by investing for almost nine decades and compound interest has made him one of the richest people in the world. If Jim Simons had started investing as early as Buffett, his fortune today would be staggering
One can learn from this that it is much easier for us humans to think linearly than exponentially. That is why we tend to focus on returns rather than a strategy that we can stick to for as long as possible.
Staying rich is a challenge
There are so many ways to build wealth, but very few ways to stay wealthy. The reason why it is so difficult to build up wealth and subsequently also to be able to hold it is that it requires different skills and mindsets. To build up wealth, you need a certain optimistic attitude to take risks and thereby generate returns. Interestingly enough, it takes exactly the opposite to keep the wealth made. As has been shown, it takes humility and modesty and a certain degree of pessimistic attitude to remain wealthy.
Wealth is what you don’t see
However, wealth is what one does not see. It’s all those expensive things that were NOT bought. So wealth is made up of money that has not been turned into stuff. This is why so many lose their wealth as quickly as they built it up. When someone says they would like to be a millionaire, they usually mean that they would like to spend a million. And that’s exactly the opposite of being a millionaire. Savings come from spending less. We spend less when we are less greedy for goods. And we will be less greedy for all sorts of goods when we care less about what others think of us.
What´s the optimal portfolio?
The optimal portfolio allows you to sleep at night. Most academic understandings of the ideal portfolio ignore the very real human factors that come into play and that may cause you to deviate from the strategy.
Know what game you are playing
If you have a buddy who is making lots of money trading short-term and you want to make money too, but you have a time horizon of 20 years and like the simple nature of passive investing, it would be stupid for you to start playing your buddy’s game. If the strategy doesn’t fit your investment horizon, you won’t sleep well at night and it will most likely go wrong or you will make wrong decisions along the way.
Leave room for error
If you want to be in the game for the long run, you need to leave room for error. Room for error lets you endure a range of potential outcomes, and endurance lets you stick around long enough to let the odds of benefiting from a low-probability outcome fall in your favor.
The highest form of wealth
The ability to do what you want, when you want, with who you want, for as long as you want, is the highest dividend money pays.
These were just a few of the book’s key takeaways. I can only recommend this book to everyone, and I think it forms a certain basic understanding and increases our awareness of everyday financial activities. The book is entertaining, and all the important points are well-summarized at the end of the book. Have fun while reading.