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Money
Money. It’s a force that drives our everyday decisions, shapes societies, and defines success in modern economies. Yet, as much as we think of it in cold, hard numbers, the reality is that our relationship with money is deeply emotional. In a world where technology is transforming finance, from digital wallets to decentralized cryptocurrencies, understanding the psychology of money has never been more critical.
The video, based upon the best selling book, The Psychology of Money, dives into this complex relationship, blending financial arithmetic with human behavior. With technology disrupting traditional financial models, particularly in the cryptocurrency and blockchain space, understanding how people relate to wealth is key to navigating this new world. This article takes a critical look at the video’s key themes, draws parallels to emerging financial technologies like crypto, and explores the broader implications for the future of finance. As we move toward an increasingly digital economy, what lessons can we take from our deep-seated emotional connection to money?
At its core, the book The Psychology of Money explores how our relationship with money is far from logical. Instead of treating financial decisions as cold calculations, the video argues that ego, pride, fear, and personal history heavily influence how people handle money. It emphasizes that financial success is less about how much you know and more about how you behave.
Several key ideas are explored: the importance of compounding, the difference between being rich and being wealthy, and the role of luck and risk in financial success. It highlights how emotional biases shape financial decisions, often more than market fundamentals. Warren Buffett’s career is used as a case study to illustrate how the power of compounding and long-term thinking can lead to massive wealth. The video urges viewers to embrace a more rational and long-term approach to managing money—ideas that resonate deeply with both traditional finance and the world of cryptocurrency.
Compounding as a Cornerstone of Wealth Building
The Role of Emotions in Financial Decision-Making
Luck and Risk in Financial Success
Simplifying Wealth to Behavioral Traits
Overemphasis on the Individual
While the video does a good job of covering essential concepts like compounding and emotional decision-making, it misses some of the complexities involved in navigating modern markets. In traditional finance, many people are at the mercy of broader economic systems, and in the crypto world, the extreme volatility and nascent nature of the market introduce additional risks that the video does not fully address.
Moreover, the video’s emphasis on time as a key factor in wealth building might oversimplify the challenges faced by new crypto investors. Blockchain technology evolves quickly, and what seems like a solid long-term investment today may not exist a decade from now. Therefore, the concept of compounding must be contextualized within the rapid innovation cycle of crypto markets.
The psychology of money, as presented in the video, holds significant relevance in the context of cryptocurrency and blockchain technology. In both traditional and decentralized financial systems, the emotional elements of fear, greed, and risk tolerance play crucial roles.
In decentralized finance (DeFi), compounding takes on new dimensions with staking, liquidity pools, and yield farming. These DeFi mechanisms allow users to reinvest their earnings to generate exponential returns, similar to traditional compounding in stocks or bonds. For example, platforms like Yearn.Finance offer automated compounding strategies, showing how crypto is incorporating classic financial principles while decentralizing the process.
The volatility of cryptocurrencies makes the role of luck even more pronounced than in traditional finance. Projects that explode in value often do so due to timing, and those who entered the market early have seen returns far beyond what could be reasonably predicted. Similarly, risk in crypto is heightened due to the speculative nature of many projects, regulatory uncertainty, and technological vulnerabilities like hacks. While luck can lead to massive rewards, risk management strategies are even more critical in crypto.
The HODL philosophy in crypto perfectly aligns with the video’s message about the importance of emotional control. While it’s easy to panic during market downturns, those who have held onto their investments through the crypto winter have often reaped significant rewards. For instance, early Bitcoin adopters who held their coins during multiple crashes saw unprecedented returns as the market recovered.
In the decentralized world, smart contracts and automated trading also help remove some of the emotional biases from financial decision-making, a crucial development for reducing human error in investing.
As we look toward the future, the psychology of money will continue to play a significant role in both traditional finance and the evolving world of cryptocurrency. As blockchain technology matures, it will democratize access to financial services, reducing reliance on central institutions and encouraging personal accountability. The emotional challenges discussed in the video will still apply—perhaps even more so in decentralized finance, where individuals must take full responsibility for their financial decisions.
Blockchain technology offers transparency and immutability, which could alleviate some of the fear and mistrust traditionally associated with financial institutions. However, the decentralized nature of crypto also brings new risks and uncertainties. Projects can fail due to technical flaws or governance issues, making the emotional discipline of investors even more important.
DeFi is likely to continue its rapid growth, and with it, the need for users to understand the long-term implications of their investments. As more traditional financial principles—like compounding and diversification—are integrated into decentralized ecosystems, the divide between traditional and crypto finance will narrow. Investors will need to balance the emotional aspect of investing with the innovative tools that blockchain offers.
Having worked extensively in both traditional finance and blockchain technology, I’ve witnessed firsthand how emotions can shape market behavior. In crypto, this effect is magnified. Fear-driven sell-offs and greed-fueled price surges are common, especially in a market as speculative as this one. However, those who learn to manage these emotional extremes often emerge as the most successful investors.
Crypto, like traditional finance, rewards patience and long-term thinking. The key is not to get swept up in the daily price fluctuations but to have a broader vision for the future of decentralized technology. Blockchain is still in its early stages, and much like Warren Buffett’s early investments, the real payoff will come with time.
The Psychology of Money, as outlined in the video (based upon the best selling book), offers timeless lessons for anyone navigating the financial world—whether in traditional markets or the decentralized realm of cryptocurrency. The interplay between emotion and financial decision-making will always exist, but by understanding these forces, we can make smarter, more informed choices.
For those in the crypto space, the power of compounding, emotional discipline, and the balance of risk and reward are just as relevant as they are in traditional finance. As we move forward into a more decentralized future, these lessons will be crucial in helping investors make the most of emerging opportunities while avoiding the pitfalls of emotional decision-making.
The future is bright for those who can master not just the technical aspects of finance but the psychological ones as well. And as blockchain continues to reshape the financial landscape, those who understand both the technology and the human elements behind it will be best positioned to succeed.
Here are the key insights from The Psychology of Money and how these foundational concepts apply to crypto investing. This lesson explores the intersection between human behavior, money, and finance—areas that are crucial for anyone entering the world of cryptocurrency. We will explore how emotions influence financial decisions, the power of compounding, the difference between wealth and richness, and how luck and risk play into success. By the end of this lesson, you’ll have a clearer understanding of how to approach your financial decisions, especially in the rapidly evolving crypto world.
Money isn’t just numbers on a spreadsheet or tokens in a digital wallet. It intertwines with human emotions like ego, pride, and fear. While many believe that financial success depends solely on mathematical calculations or market strategies, decisions about money are often shaped by personal history and emotional responses.
In crypto, the decentralized nature of digital assets can amplify emotional decision-making. Market volatility leads to fear and greed cycles, and these emotions often drive buying and selling behaviors. Understanding that emotions can cloud judgment is crucial for making rational, long-term decisions in crypto investing.
Just as our DNA influences our physical traits, our financial DNA is shaped by our upbringing, personal experiences, and the economic environments we grew up in. For example, those who lived through stock market booms, like people born in the 1970s, often view markets optimistically. Conversely, those who faced stagnation or inflation, like those born in the 1950s, may be more cautious.
This applies to cryptocurrency as well. Early adopters who experienced the explosive growth of Bitcoin or Ethereum may be more inclined to take risks. Meanwhile, those who entered the market during downturns may be more conservative. Recognizing your financial DNA helps you understand your biases and how your personal history shapes your risk tolerance.
Compounding is one of the most powerful forces in finance, and it’s especially relevant in long-term crypto investing. Compounding occurs when you earn returns not just on your initial investment but also on the returns generated by that investment. Over time, this exponential growth can lead to significant financial gains.
For instance, investing $1,000 in Bitcoin or a high-growth altcoin at an 8% annual rate could lead to dramatic gains over time. The earlier you invest, the more time your money has to grow, especially when reinvesting your profits. Warren Buffett’s wealth is a testament to the power of compounding—most of his fortune was built later in life because of decades of compounding.
In the world of crypto, this is why holding (HODLing) is a popular strategy. By staying invested and not reacting to short-term volatility, you give your assets time to compound and grow. The key takeaway is to start early and remain patient.
There is a fundamental difference between being rich and being wealthy. Richness is about current income and the flashy possessions people often show off—luxury cars, expensive clothes, and lavish homes. Wealth, on the other hand, is about the financial assets that you haven’t spent yet. It’s about having control over your financial future.
In crypto, many are seduced by the sudden wealth created during bull markets, but true wealth is built by those who resist the temptation to spend it all. Instead of cashing out for temporary pleasures, focus on accumulating and growing your digital assets. Wealth building requires self-control, restraint, and a long-term focus.
Success in investing, whether in traditional markets or crypto, often involves a mix of talent and luck. Some people might attribute their success to their investing acumen, but luck—like entering the market at the right time—often plays a significant role. At the same time, risk is ever-present. Just as luck can lead to massive gains, taking on too much risk can lead to significant losses.
Crypto is an extremely volatile space, where fortunes are made and lost in short periods. Recognizing the role of luck and risk in your success can help you stay humble and avoid overconfidence. Crypto investors often face black swan events—unexpected market crashes or hacks that wipe out assets. Therefore, balancing risk and reward is crucial.
In investing, a small number of successful investments—long-tail events—can account for the majority of returns. Warren Buffett’s wealth is largely attributed to a few key stock picks, while many of his other investments have been average or even failures. This principle holds true in crypto investing.
The crypto market is filled with projects, but only a few truly succeed. Early investments in Bitcoin, Ethereum, or Binance Coin generated outsized returns compared to hundreds of failed projects. For new investors, the lesson is clear: focus on finding long-term winners rather than getting caught up in every new token or ICO.
This is why diversification is critical. While most altcoins may fail, having a diversified portfolio gives you a better chance of holding that one project that will lead to significant returns.
Time is an investor’s best friend. Starting early and staying in the market increases the likelihood of benefiting from compounding. In crypto, the mantra “time in the market beats timing the market” is vital. Trying to predict short-term price movements is incredibly difficult, even for seasoned investors.
Investing early in projects with strong fundamentals and holding through the volatility allows the power of compounding to work in your favor. The sooner you begin, the more potential you have for long-term success.
One of the biggest hurdles in managing money effectively is understanding the emotional side of it. Fear and greed drive many financial decisions, especially in crypto. When the market is soaring, greed leads people to chase after rising prices. When the market crashes, fear drives them to sell at a loss.
Recognizing these emotional triggers can help you stay grounded. Successful investors in crypto understand that emotional reactions to market swings often lead to poor decisions. By keeping a long-term perspective and managing your emotions, you can avoid the pitfalls of panic-selling or FOMO-driven buying.
The key concepts focus on the complex relationship between money, human behavior, and financial decision-making.
Nature of Money: Money is not just numbers; it intertwines with human emotions like ego, pride, and fear. Financial decisions are often made based on personal history rather than pure calculations.
Financial DNA: Our experiences with money are shaped by generational influences, economic environments, and personal histories. For instance, those born in the 1970s had a positive view of the stock market due to significant gains during their youth, while those from the 1950s may have a more negative outlook.
Compounding: The power of compounding is crucial for long-term financial success. For example, investing $1,000 at an 8% interest rate can significantly grow over time due to interest on both the principal and previously earned interest.
Rich vs. Wealthy: Being rich refers to current income and possessions, while being wealthy is about financial assets that have yet to be spent. True wealth requires self-control and restraint.
Long Tails in Investing: A small number of successful investments can drive the majority of returns. For example, Warren Buffett’s wealth comes from a few key investments, despite many failures along the way.
Hedonic Adaptation: The constant pursuit of more can lead to dissatisfaction. Setting stable goals for what “enough” means is essential for happiness.
Understanding the psychology of money is essential, especially in a space as volatile and emotionally charged as crypto. By recognizing how human behavior influences financial decisions, leveraging the power of compounding, and balancing risk and reward, you can position yourself for long-term success in cryptocurrency. Remember: the key to wealth building isn’t just knowledge of the markets, but also understanding your own financial DNA and learning to manage your emotions.
Embrace the principles shared in this guide, and use them as a foundation for developing a more thoughtful and disciplined approach to crypto investing.
This serves as a foundation for understanding the psychological aspects of money and how they influence financial behavior. Use it to reflect on your own financial habits and to develop a more informed approach to managing your finances.
Money—some have it, some don’t. Some have mastered it, but most are still chasing it. You may think of money as just numbers, spreadsheets, math, or an equation that needs to be solved. But real financial decisions are made far away from calculators—around dinner tables—with ego, pride, fear, and personal history. The true nature of money is the dance between the cold arithmetic of a spreadsheet and human nature. When it comes to money, we are complicated creatures, and financial success is not so much about how much you know but how you behave.
This video was inspired by Morgan Housel’s amazing book The Psychology of Money. Let’s delve into the strange and human side of money.
Your financial DNA: You aren’t crazy. We all come from different generations, with parents earning different incomes and holding different values, living in various parts of the world, born into different economic environments, with varying incentives and opportunities. We all have very different experiences towards money. Take, for example, the stock market and inflation.
People born in 1970 saw an almost 10-fold increase in the S&P 500 during their teens and 20s, leading most to have a positive view of the stock market and a higher inclination to invest. People born in the 1950s, however, saw the stock market go nowhere during their teens and 20s, leading to a more negative view of the stock market and less inclination to invest. People born in the 1960s experienced significant inflation during their teens and 20s, leading to a higher awareness and a more negative view of inflation and its effects.
In contrast, people born in 1990 experienced relatively low inflation during their lifetime, leading to less concern and awareness of its effects. A person’s experience with the stock market and inflation during their formative years greatly shapes their attitudes and behaviors towards investing and financial decision-making. People justify every financial decision they make based on the information they had at that moment and their mental model of the world, which has been passed on to them from their parents and shaped by their unique life experiences.
Although they can be misinformed, lack information, or make bad decisions, their actions make sense to them in that moment and align with their personal story. According to Housel, people do some crazy things with money, but no one is crazy. We all have unique worldviews, and since there is no universally correct way to manage money successfully, none of us are crazy. We make financial decisions based on our personal life experiences and our worldview.
Financial decisions are often not made purely on logical or mathematical grounds but are shaped by unique experiences and perspectives. Be wary of one-size-fits-all financial advice, as what may seem irrational to others could make perfect sense to you.
Compound Kings
There is no doubt that Warren Buffett is considered one of the greatest investors of all time. What is staggering is that 81.5 billion of Warren Buffett’s 84.5 billion net worth was earned after he reached his mid-60s. Housel explains that few pay enough attention to this simplest fact. Buffett’s fortune isn’t just due to being a good investor but being a good investor since he was literally a child. As a result of investing from the early age of 10, Buffett was able to harness the power of compounding.
So, what is compounding? In a nutshell, let’s say you invest $1,000 at an interest rate of 8%. Your initial investment would earn you $80 after one year. If you compounded your total of $1,080 at 8% interest the next year, you would now earn $86.40. You’ve earned money on your initial investment as well as the interest you earned on the principal. An investment compounded over time gains interest not only from the original investment but also from the interest generated on top of the original investment.
The counterintuitive nature of compounding makes many of us not realize how extreme the results can be. Warren Buffett began seriously investing at the age of 10 and had a net worth of $1 million by the age of 30. Let’s imagine an alternate reality where Warren Buffett behaved more like most young men in their 20s and used a lot of his early income on traveling and a few nice cars. If he started with a net worth of $25,000 at the age of 30 and retired at 60 but continued to generate the amazing returns that he does of around 22% annually, his net worth today would be around $11.9 million, which is 99.9% less than his actual net worth today of $84.5 billion.
Warren Buffett’s financial success can be attributed to the financial base he built in his early years and his longevity in investing. His skill is investing, but his secret to success is time and the power of compounding. Consider this from another perspective: The richest investor of all time is Warren Buffett. However, in terms of average returns, he is not the greatest. Jim Simons, for instance, is a hedge fund manager who has compounded money at a staggering 66% annually since 1988, a much higher rate than Buffett. The net worth of Simons, however, is $21 billion, which is 75% less than Buffett’s.
How is this possible? According to Housel, the reason for this is that Simons wasn’t able to find his stride in investing until he was 50 years old, effectively giving him less than half as many years to compound as Buffett. Housel estimates that if Simons had invested over a time frame as long as Buffett, his net worth today would be $63 quintillion, 900 quadrillion, 781 trillion, 780 billion, 748 million, 160 thousand dollars.
It’s important not to underestimate the power of compounding. No matter how counterintuitive the results of compounding may seem, they should never be ignored. People often focus on short-term gains, overlooking the long-term impact of compounding. Understanding and leveraging the power of compounding is crucial for long-term financial success. It’s not about making quick high returns but about consistent long-term growth.
Pessimism and Money
Optimism is the belief that the odds of a good outcome are in your favor over time, even if there are setbacks along the way. But when it comes to money, we all have a bias toward pessimism that we hold dear in our hearts. Looking back, however, things have generally improved over the years. So what is it about pessimism that we are inclined to embrace rather than optimism? The answer is that good things take time and don’t happen overnight. Money is a subject that attracts pessimism for a variety of reasons.
Let’s start with the fact that money matters to all of us. When we hear about something bad happening in the economy, we’re more likely to pay attention. For example, a 40% decline in the stock market over six months is likely to attract attention immediately and may even attract government intervention. However, the incremental nature of a 140% gain over six years can go largely unnoticed. Every year, half a million Americans are saved by the progress of medicine over the last 50 years. Slow progress, however, attracts less attention than quick, sudden losses such as terrorism, plane crashes, and natural disasters.
There are many overnight tragedies but few overnight miracles. To be practical, we don’t have to be pessimistic. Despite setbacks, we can hold on to the belief that, over time, the odds of a positive outcome are in our favor. When watching the news highlighting a stock market crash, economic woes, or other money problems, try to remember that things tend to improve over time. Don’t let the allure of pessimism cloud your judgment. A balanced, reality-based optimism, viewed over a longer time horizon, is often more rational for long-term success and can reveal opportunities you would miss with a pessimistic outlook.
Two Forgotten Elements
In 1968, there were roughly 300 million high school-aged people in the world. Of those 300 million, 300 students attended a small school in Seattle called Lakeside. Lakeside happened to be the only high school in the world at the time that had a professor with the foresight to lease a computer, the Teletype Model 30. This was no ordinary computer; it was advanced for the time, the type of computer that even graduate students didn’t have access to. For one lucky student at Lakeside, this would change everything. That student was Bill Gates.
From 300 million down to 300, so in 1968, there was roughly a one-in-a-million chance of being a high school student with access to a computer. Bill Gates and his schoolmate, Paul Allen, would go on to create Microsoft together. Even as a teenager, Gates showed exceptional intelligence, hard work, and a vision for computers unlike anyone else. But going to Lakeside also gave him a one-in-a-million competitive advantage and head start, and Gates is not shy about this. In 2005, he said, “If there had been no Lakeside, there would have been no Microsoft.”
What is not often mentioned in the early Microsoft story was a third member of this gang of high school computer prodigies: Kent Evans. Just as intelligent, just as visionary, Kent could have very well been one of the founders of Microsoft alongside Gates and Allen. However, that would not happen. A mountaineering accident took Kent’s life before he graduated high school. The odds of a high school student being killed in a mountaineering accident are around one in a million. Just as the extremely rare stroke of luck propelled Bill Gates and Paul Allen to great success, Kent Evans would experience an extremely rare event with what Housel calls the “close sibling of luck”—risk.
Luck and risk are like the winds and the waves that determine the course of a sailboat. The sailor can control the rudder and the sails, but ultimately, the direction and speed of the boat are influenced by external factors that cannot be fully predicted or controlled. The pursuit of success is full of twists and turns, and the role of luck and risk in shaping our lives is an important perspective to keep in mind. Understanding that success is a complex combination of factors, including both talent and luck, can help us approach our own financial decisions with greater humility and perspective.
Be cautious in attributing your own successes or failures solely to your actions. Acknowledge the roles of luck and risk. When learning from others, try to emulate broad patterns you encounter, as opposed to extreme individual examples that often involve a high degree of luck or risk. These extreme cases are not easily replicable.
The Key to Happiness
People want to become wealthier to make themselves happier, but according to Housel, the key to happiness is the ability to do what you want, when you want, with who you want, for as long as you want. The pursuit of material wealth has led many people to work harder and give up more control over their time, despite being richer than ever before. However, studies show that having control over your life is the most dependable predictor of positive feelings of well-being, more than your salary, house size, or career prestige.
Ultimately, controlling your time is the highest dividend money pays. Pursuing money without valuing time is like filling a bucket with a hole in it. No matter how much water you pour in, it will continue to leak out. Similarly, no matter how much money you accumulate, it won’t bring lasting happiness if you don’t have control over your time and can’t enjoy the fruits of your labor.
Prioritize gaining control over your time when considering how to use or invest your money. The freedom to do what you want, when you want, is often more valuable than any material possession.
Tail Events
Heinz Berggruen, a man who fled Nazi Germany and settled in America, became one of the most successful art dealers of all time. He collected a massive amount of art, including works by famous artists like Picasso, Klee, and Matisse. In 2000, he sold part of his collection for over 100 million euros. But what was his secret to acquiring so many masterpieces? Was it skill? Was it luck?
According to Horizon, a research firm, great investors buy vast quantities of art and hold on to them for a long period of time. They wait for a few of those paintings to become well-known and worth a lot of money, even though most of the paintings they bought were not worth very much. In other words, it’s not about being right all the time but having a diversified portfolio and waiting for just a few winners to emerge.
Perhaps 99% of the work someone like Berggruen acquired in his life turned out to be of little value. He could be wrong most of the time, but that doesn’t particularly matter if the other 1% turns out to be the work of someone like Picasso. These events are known as long tails when a small number of events account for the majority of outcomes. The long tails of Berggruen’s art collection are what led to his ultimate fortune.
The story of Berggruen teaches us a valuable lesson about investing, and this long-tail concept also applies to many aspects of business and investing. The obvious example is venture capital. Most of the startups in a VC fund will fail and lose money for the fund, but all they need are a few outlier startups, which make 20x returns to make up for these losses.
Take Amazon, for instance. In 2018, it drove 6% of the returns on the S&P 500, even though it is just one company. If we look inside Amazon, its growth was largely driven by two tail events: Amazon Prime and Amazon Web Services. These two products alone more than made up for all of Amazon’s less successful experiments, such as the Fire Phone or travel agencies. After the disastrous release of the Amazon Fire Phone, rather than apologizing to shareholders, Jeff Bezos said, “If you think that’s a big failure, we’re working on much bigger failures right now. I’m not kidding. Some of these are going to make the Fire Phone look like a tiny little blip.”
Bezos understands that it’s okay to make mistakes and fail with most products if the process creates the 1% of tail event products that drive everything. Tail events are mostly unintuitive and hidden from us because we only see the finished products, not all the failures along the way that led to that finished product. Housel, in the book, uses a real-life example of a stand-up comedian. When you’re watching the Netflix special, you’re probably saying to yourself, “Wow, this comedian is amazing and hilarious!” But what you aren’t seeing are all the trial-and-error, failed jokes that the comedian tried out in small clubs all around the country before doing the special. The Netflix special is the 1% compendium of all the tail-event jokes that actually made people laugh; 99% of the jokes along the way were probably just okay.
When it comes to investing, even though long tails are prevalent, most of us ignore them. When things go wrong, we tend to overreact. As soon as you accept that tails drive everything in business, investing, and finance, you realize lots of things may go wrong, fail, or fall apart. Remember: out of nearly 500 stocks Warren Buffett has picked, only 10 have made the majority of his money. Good stock pickers will only be right half of the time. Good leaders will only make good decisions half of the time. The fact that you might be wrong sometimes doesn’t mean that things won’t work out over time. In the end, the outcome can be determined by only a small number of events.
In investing and business, don’t sweat frequent failures or average results. Success often hinges on a few major wins or tail events that outweigh your losses.
True Wealth vs. Being Rich
It’s so important to understand the difference between being rich and being wealthy. Richness is about your current income and the things that you own, while wealth is about the financial assets that you have yet to spend. True wealth isn’t what you see but what you don’t. It’s easy to assume that someone driving a Lamborghini is wealthy, but appearances can be deceiving. In reality, many individuals are living beyond their means and relying on debt to fund their flashy lifestyles.
Wealth isn’t about the cars you drive, the diamond rings, or the homes you own—it’s about those financial assets that you have yet to spend. Accumulating wealth takes self-control and restraint. The diamonds, watches, and first-class upgrades that you decline all contribute to your overall wealth. It’s easy to find rich role models who spend lavishly, but true wealth is hidden and therefore harder to imitate. We’re conditioned to believe that having money means spending money, but the real key to building wealth is to save and invest the money you have. In fact, the only way to be wealthy is to not spend the money that you do have.
The next time you see someone driving a fancy car or living in a big house, remember: you can’t judge wealth by appearances alone. The true key to wealth is self-control, restraint, building assets, and investing in your future. Aim for long-term financial security by accumulating valuable assets rather than equating wealth with material possessions like flashy cars and luxury goods. Focus on building true wealth, not just the appearance of being rich.
The Real Price
Imagine you’re climbing a mountain with the goal of reaching the peak and admiring the amazing view. Maybe you’ll get sunshine that day, maybe rain. You may get lost; you may fall and injure yourself. The difficulty of the climb is not always apparent until you’re in the thick of it
. From the ground looking up, the path to take may seem obvious, but along the way, you’ll certainly need to reassess and change your path to the peak. You are under no illusion, however, that there will be some golden escalator that will safely take you to the peak. You understand before the climb that this uncertainty and risk are just the price you have to pay to get to the top.
But when it comes to investing in the stock market, many people think they can avoid the uncertainty and risk and get something for nothing. Housel likens the stock market to getting a new car. If you want to get a new car, you have three options: you can buy a new car, buy a used one, or you can steal one. The new car is a higher price, but the reward is greater. Think of the new car like aiming for 12% returns from the stock market. The used car is cheaper but also comes with less reward. The used car is a much safer investment but only returns 4% per year.
Stealing a car is like trying to get something for nothing. Ninety-nine percent of people would avoid stealing the car because the consequences outweigh the benefits. However, when it comes to the stock market, people seem to be under the impression that they can take option three and steal from the market. They try all kinds of tricks and strategies to get good market returns without paying the price, attempting to sell right before the dip or buy before a boom.
Consider, for example, wanting to earn an 11% return over 30 years in preparation for your retirement. From 1950 to 2019, the Dow Jones Industrial Average has returned about 11% per year over those 69 years. However, of course, there have been many high highs and low lows. For many, the sight of their investment going up and down can be dramatic, so they try to get in and out quickly without paying the price of volatility and uncertainty over the long term, akin to trying to steal the car.
The price you must pay is not just about dollars or cents when investing; it’s about accepting the emotions that volatility, fear, and risk can bring. Recognizing that successful investing comes with a price is crucial. The price is not immediately obvious, but you have to pay it just like you would for any other product. The key is to convince yourself that the market’s fee is worth it and it’s an admission fee worth paying. There’s no guarantee that it will be, but if you see the admission fee as a fine, you’ll never enjoy the experience. Be willing to pay the price once you find it.
View market volatility as an admission fee for the potential of higher returns rather than as a fine for doing something wrong. This mindset will help you stick with your investment strategy for longer periods and during tough times.
Hedonic Treadmills: Enough
No one ever knows when enough is enough. Become familiar with the concept of hedonic adaptation or the hedonic treadmill. Every time you hit a goal, you keep moving the goalpost further ahead. You need only look at the demands of Bernie Madoff and Rajat Gupta, two men who already had everything and were ultra-wealthy, but all the money in the world would never have been enough, both resorting to crime to make even more money.
The pursuit of wealth and success without a sense of knowing when enough is enough is like climbing a never-ending ladder. No matter how high one climbs, there is always another rung to reach for, and the pursuit can become all-consuming, leading to a lack of happiness and fulfillment. Set a stable goal for what “enough” means to you. Otherwise, rising expectations will keep you perpetually unsatisfied and prone to needless risks.
Be aware of the pitfalls of social comparison. Instead of endlessly comparing yourself to others, focus on what truly brings you happiness and fulfillment.