The Psychology of Money by Morgan Housel

Building wealth has lots to do with your savings rate. Personal savings and frugality are in your control just like saving energy by being more efficient. Your wealth clearly relies on your savings rate, while investment returns are something you can’t control. Saving gives you more control over your time and more options. These are the world’s most valuable currencies.

Sometimes doing something that seems reasonable helps you sleep better at night rather than being strictly rational. It may seem rational to start selling when the market goes down, but it’s reasonable to hang on as that approach has been shown to work better in the long run.

The correct lesson to learn for surprises is that the world is surprising. Things that have never happened before happen all the time. Outlier events do more to drive the economy than events that are easier to predict and you will no doubt not see them coming. We should be careful about using history to predict the future. History also doesn’t account for structural changes. Investing formulas from decades past simply don’t work anymore. The further back you look in history, the more general your takeaways should be.

You have to give yourself room for error. In other words, you have to plan on your plan not going to plan. Make sure you have enough money to withstand swings of bad luck. Remember, the world is governed by odds, not certainties. Practically this means keeping enough money in cash in case your stocks turn South. Also, save more than you project that you will need to retire when the time comes. Don’t take on debt to increase your investments. Avoid single points of failure. Jets can fly with one engine and land with none. Suspension bridges can lose many strands without falling. Don’t solely rely on your next paycheck to feed your family. Have backups for your backups.

Trying to plan a lifetime career when you are still in high school isn’t likely to work so well. Today, only 27% of college grads have a job related to their major. If you stay anchored to your past you are more likely to be miserable. We all tend to walk around with the illusion that our personal history has come to an end. That is probably not the case. Your wants and needs are likely to change. This is one more reason why you need to buy and hold so you can take advantage of compounding.

The price of doing well in the market over time is the uncertainty and volatility that comes with it. It’s the price you have to pay. Think of it as an admissions fee to Disneyland. The best stocks spend most of their time trading below the all-time highs.

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