The Psychology of Money
Never Enough John Bogle, the Vanguard founder who passed away in 2019, once told a story about money that highlights something we don’t think about enough:
At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch22 over its whole history. Heller responds, “Yes, but I have something he will never have … enough.”
Enough. I was stunned by the simple eloquence of that word —stunned for two reasons:
first, because I have been given so much in my own life
and, second, because Joseph Heller couldn’t have been more accurate.
For a critical element of our society, including many of the wealthiest and most powerful among us, there seems to be no limit today on what enough entails. It’s so smart, and so powerful.
If you risk something that is important to you for something that is unimportant to you, it just does not make any sense.
There is no reason to risk what you have and need for what you don’t have and don’t need.
It’s one of those things that’s as obvious as it is overlooked.
Remember few things
The hardest financial skill is getting the goalpost to stop moving
If expectations rise with results there is no logic in striving for more because you’ll feel the same after putting in extra effort.
It gets dangerous when the taste of having more—more money, more power, more prestige—increases ambition faster than satisfaction.
Modern capitalism is a pro at two things.
Generating wealth and generating envy. Perhaps they go hand in hand.
Wanting to surpass your peers can be the fuel of hard work. But life isn’t any fun without a sense of enough.
Happiness, as it’s said, is just results minus expectations.
Social comparison is the problem here
Consider a rookie baseball player who earns $500,000 a year. He is, by any definition, rich.
But say he plays on the same team as Mike Trout, who has a 12-year, $430 million contract. By comparison, the rookie is broke. But then think about Mike Trout. Thirty-six million dollars per year is an insane amount of money.
But to make it on the list of the top-ten highest-paid hedge fund managers in 2018 you needed to earn at least $340 million in one year. That’s who people like Trout might compare their incomes to.
And the hedge fund manager who makes $340 million per year compares himself to the top five hedge fund managers, who earned at least $770 million in 2018.
Those top managers can look ahead to people like Warren Buffett, whose personal fortune increased by $3.5 billion in 2018.
And someone like Buffett could look ahead to Jeff Bezos, whose net worth increased by $24 billion in 2018—a sum that equates to more per hour than the “rich” baseball player made in a full year.
The point is that the ceiling of social comparison is so high that virtually no one will ever hit it. Which means it’s a battle that can never be won, or that the only way to win is to not fight to begin with—to accept that you might have enough, even if it’s less than those around you.
“Enough” is not too little
The idea of having “enough” might look like conservatism, leaving opportunity and potential on the table.
I don’t think that’s right.
“Enough” is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret.
There are many things never worth risking, no matter the potential gain
After being released from prison Rajat Gupta told The New York Times he had learned a lesson.
Don’t get too attached to anything—your reputation, your accomplishments or any of it.
I think about it now, what does it matter? O.K., this thing unjustly destroyed my reputation.
That’s only troubling if I am so attached to my reputation. This seems like the worst possible takeaway from his experience, and what I imagine is the comforting self justifications of a man who desperately wants his reputation back but knows it’s gone.
Reputation is invaluable.
Freedom and independence are invaluable.
Family and friends are invaluable.
Being loved by those who you want to love is invaluable.
Happiness is invaluable.
And your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them. Knowing when you have enough.
The good news is that the most powerful tool for building enough is remarkably simple, and doesn’t require taking risks that could damage any of these things. That’s the next chapter.
More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful. But few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child.
As I write this Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s. Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him. Consider a little thought experiment.
Buffett began serious investing when he was 10 years old. By the time he was 30 he had a net worth of $1 million, or $9.3 million adjusted for inflation.
What if he was a more normal person, spending his teens and 20s exploring the world and finding his passion, and by age 30 his net worth was, say, $25,000?
And let’s say he still went on to earn the extraordinary annual investment returns he’s been able to generate (22% annually), but quit investing and retired at age 60 to play golf and spend time with his grandkids.
What would a rough estimate of his net worth be today?
Not $84.5 billion.
$11.9 million.
99.9% less than his actual net worth.
Effectively all of Warren Buffett’s financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years.
His skill is investing, but his secret is time.
That’s how compounding works.
Getting Wealthy Vs Staying Wealthy
There are a million ways to get wealthy, and plenty of books on how to do so.
But there’s only one way to stay wealthy: some combination of frugality and paranoia.
And that’s a topic we don’t discuss enough.
If I had to summarize money success in a single word it would be “survival.”
As we’ll see in chapter 6, 40% of companies successful enough to become publicly traded lost effectively all of their value over time. The Forbes 400 list of richest Americans has, on average, roughly 20% turnover per decade for causes that don’t have to do with death or transferring money to another family member.
Capitalism is hard. But part of the reason this happens is because getting money and keeping money are two different skills.
Getting money requires taking risks, being optimistic, and putting yourself out there.
But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.
There are two reasons why a survival mentality is so key with money.
One is the obvious: few gains are so great that they’re worth wiping yourself out over.
The other, as we saw in chapter 4, is the counterintuitive math of compounding.
Compounding only works if you can give an asset years and years to grow. It’s like planting oak trees: A year of growth will never show much progress, 10 years can make a meaningful difference, and 50 years can create something absolutely extrahyordinary.
But getting and keeping that extraordinary growth requires surviving all the unpredictable ups and downs that everyone inevitably experiences over time.
We can spend years trying to figure out how Buffett achieved his investment returns:
how he found the best companies, the cheapest stocks, the best managers. That’s hard. Less hard but equally important is pointing out what he didn’t do.
He didn’t get carried away with debt.
He didn’t panic and sell during the 14 recessions he’s lived through.
He didn’t sully his business reputation.
He didn’t attach himself to one strategy, one world view, or one passing trend.
He didn’t rely on others’ money (managing investments through a public company meant investors couldn’t withdraw their capital).
He didn’t burn himself out and quit or retire.
He survived. Survival gave him longevity. And longevity— investing consistently from age 10 to at least age 89—is what made compounding work wonders. That single point is what matters most when describing his success.
Applying the survival mindset to the real world comes down to appreciating three things.
1. More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.
No one wants to hold cash during a bull market. They want to own assets that go up a lot. You look and feel conservative holding cash during a bull market, because you become acutely aware of how much return you’re giving up by not owning the good stuff. Say cash earns 1% and stocks return 10% a year. That 9% gap will gnaw at you every day.
But if that cash prevents you from having to sell your stocks during a bear market, the actual return you earned on that cash is not 1% a year—it could be many multiples of that, because preventing one desperate, ill-timed stock sale can do more for your lifetime returns than picking dozens of big-time winners.
Compounding doesn’t rely on earning big returns. Merely good returns sustained uninterrupted for the longest period of time—especially in times of chaos and havoc—will always win.
2. Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
What’s the saying? You plan, God laughs. Financial and investment planning are critical, because they let you know whether your current actions are within the realm of reasonable. But few plans of any kind survive their first encounter with the real world. If you’re projecting your income, savings rate, and market returns over the next 20 years, think about all the big stuff that’s happened in the last 20 years that no one could have foreseen: September 11th, a housing boom and bust that caused nearly 10 million Americans to lose their homes, a financial crisis that caused almost nine million to lose their jobs, a record-breaking stockmarket rally that ensued, and a coronavirus that shakes the world as I write this.
A plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality.
3. A barbelled personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.
Optimism is usually defined as a belief that things will go well. But that’s incomplete. Sensible optimism is a belief that the odds are in your favor, and over time things will balance out to a good outcome even if what happens in between is filled with misery. And in fact you know it will be filled with misery. You can be optimistic that the long-term growth trajectory is up and to the right, but equally sure that the road between now and then is filled with landmines, and always will be. Those two things are not mutually exclusive.
Imagine if you were a parent and could see inside your child’s brain. Every morning you notice fewer synaptic connections in your kid’s head. You would panic! You would say, “This can’t be right, there’s loss and destruction here. We need an intervention. We need to see a doctor!” But you don’t. What you are witnessing is the normal path of progress.
Economies, markets, and careers often follow a similar path— growth amid loss.
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