The Psychology of Money by Morgan Housel

When it comes to investing the big secret is time! The reason Warren Buffet is worth in excess of $80 billion is that he started when he was very young and invested well ever since. The Earth’s ice ages are an example of how leaving a little ice unmelted each summer can soon cover large parts of the planet with ice. Compounding your modest yearly gains can make you wealthy if you are patient.

More than big returns you want to be financially unbreakable. This might even bring you the biggest returns as you will be around long enough for compounding to work. Don’t get carried away with debt and don’t buy stocks on the margin. Some combination of frugality and paranoia is a good thing. (Doug: As your paycheck and assets grow, don’t let your lifestyle grow at the same rate.)

When investing you can be wrong most of the time and still end up very right. It is normal for lots of things to fail so don’t overreact when they do. Walt Disney made a lot of great cartoons but consistently lost money until Snow White came along. The majority of the venture capital industry’s returns come from half a percent of their investments. Also, don’t think you can sell when a recession hits and buy back when it’s over and beat the person who buys and holds. You can’t. Warren Buffet has owned over 400 stocks in his life and has made most of his money from ten of them. (Doug: It isn’t mentioned here but this is the rationale for buying exchange-traded funds like the Dow, S&P, or Russell. With one purchase you buy a big basket of stocks and over time the winners outpace the losers. Also, the real losers are kicked out of the exchanges and new winners are added.)

The highest form of wealth is being able to do whatever you want. Controlling your life is the highest dividend that money pays. While wealth correlates with happiness it doesn’t guarantee happiness. It helps to have six months’ emergency expenses so you can walk away from a bad situation or a bad boss. Doing something you love on a schedule can feel the same as doing something you hate. Our society has gone from having most jobs rely on what people do to relying on what people think. Your tool will most likely be your head, which can make it seem like you are working 24/7. The most valuable things then turn out to be quality relationships with friends and family and being part of something bigger than yourself.

A lesson from a valet is that owning expensive cars or houses won’t bring you respect. Rather attributes like humility, kindness, and empathy will bring you more respect than horsepower ever will.

Spending money to show people how much money you have is the fastest way to have less money. Wealth is what you don’t see. Someone with a $100,000 car has $100,000 less than they had before they bought the car. We rely on outside appearances when we can’t see bank accounts. It’s like undoing a lot of exercise by eating a lot of food. Not spending requires self-control, but that is how you create wealth. Would you rather look modest and be wealthy or look rich and live on the razor’s edge of insolvency?