The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel

It’s difficult to learn from the surprises that impact investing. About all you can learn is don’t be surprised if you are surprised. Things that have never happened before happen all the time. History is mostly the study of surprising events. Experience, therefore, can lead to overconfidence.
If you rely too much on investment history, you are likely to miss outlier events that move the needle the most. Examples are 9/11, the fall of the Soviet Union, and The Great Depression. History can be handy if you look at how people generally respond along with their relationship to greed and fear.

The most important part of any plan is planning on your plan not working. Like someone counting cards at a blackjack table you are playing a game of odds, not a game of certainty. You need a margin of safety or room for error or redundancy. A room for error lets you endure a range of potential outcomes.
There may be a gap between what you can technically endure and what you can emotionally endure. Use room for error when estimating your future returns. Morgan recommends being able to lose one third of what you have as a range of error. You have to take risk to get ahead, but be sure to avoid single points of failure.

People from 18 to 68 underestimate how much they will change over time. Compounding works best when you can give it decades decades for grow. Endurance is key. Avoid the extreme ends of financial planning. It’s ok to abandon your financial plan. Don’t anchor decisions to past efforts that can’t be refunded (sunk costs).

When you enter the financial market, you will experience volatility, doubt, fear, uncertainty, and regret. The trick is to view these features as a fee, not a fine. Even the highest performing stocks spend at least 95% of time below their previous highs. It’s all about your mindset.

Beware of taking financial cues from people playing a different game than you. Day traders invest in overpriced stocks because they don’t plan on holding them for long. You shouldn’t. Bubbles result from people moving toward short-term trading to capture momentum that had been feeding on itself. The dot.com bubble of the 1990s and the housing bubble of the 2000s are examples. In the later case, people saw how others were making money flipping houses and tried it themselves until it was too late.

Optimism is the belief that the odds of a good outcome are in your favor over time, even when there will be setbacks. This is pretty much how financial markets work. Downturns get a lot more coverage as does bad news in general. (Doug: I’m reminded of the saying “If It Bleeds, It Leads.”) Pessimism just sounds smarter and more plausible. Pessimism is more fashionable. This is why so many college educated people watch cable news, which is very pessimistic.
In an evolutionary sense, organisms that treat threats more seriously than opportunities are more likely to survive and reproduce. Problems that seem unsolvable overtime get solved. The Wright Brothers are a good example. Their early flights hardly made news, and few people saw a lucrative economic future for their airplane.