The Summary
The book is about how human thinking affects financial (or life) decisions. Different behaviors affect how people approach investing and increasing wealth. The book defines the most important ones while giving a holistic picture of how greed prevents people from improving their lives and how people can create or destroy wealth along with their happiness. Then, the book dives into eighteen different factors that affect human judgment on money, wealth and happiness.
Timeless Lessons on Wealth, Greed and Happiness
Your behavior with money is the most important compounding factor of your wealth or your loss. How you approach money, in good or bad times, can change the place you end up. It’s crucial to get the priorities right, line up to them, and don’t move the goalpost. What works for you will not work for anyone else. Everyone’s motives are different. That’s why you shouldn’t listen to every piece of advice you hear. Make up your mind. How to make the best financial decision is, in the end, black and white: are you able to sleep well at night?
Chapter 1: No One’s Crazy
Everyone’s financial decisions or how they see money is different and doesn’t always have logical explanations. It depends on the time they were born, the city/country they lived in their younger years, their and their families’ financial status, and their family’s approach to money have an impact. That’s why everyone is unique. Also, for some reason, everyone’s understanding of the economy and how the financial system works is different. Anyone’s understanding can cover 80% of their financial knowledge but represents a fraction of how the system actually works. That’s why when people spend/invest their money, there is no craziness; everyone sees differently. Why they spend money in a certain way probably makes sense to them, even though it might be completely wrong. So, don’t think everyone is crazy or you’re doing the wrong thing. There is no right approach. Considering the very short history of economic enhancements we had (like retirement system, stocks, etc.) compared to how long we exist as a species or how long we have money in the world, we still don’t know what’s the best strategy that works. There is no best strategy. We know very little and don’t have a chance to understand or learn every factor that contributes to how money works.
Chapter 2: Luck & Risk
When we’re in front of a successful person, we attribute their success to the hard work they put in, but when they don’t hear us, we tend to talk more about their luck. When it comes to saying to others, we go easily and say, “They were lucky.” But when we are successful, we diminish the effect of luck ourselves because we see all the hard work we put in. We don’t think that luck plays a big role.
The same applies to the risk. When we’re successful, we see all the risks we have taken, but when someone else is successful, we diminish the risks involved. Similar things apply to failures.
The best way to cope with luck and risk is when things are going really well; we shouldn’t fool ourselves into thinking that luck played no role there. The same applies to risk the other way around. When things go bad, we shouldn’t think that all decisions are terrible; we took a risk and were not lucky. What we can do is to reduce the impact of the risks we take. For example, while arranging our financial life, we can try to ensure that a single financial investment will not wipe us out if things go bad there.
“Nothing as good or as bad as it seems.”
Chapter 3: Never Enough
The thing many rich people don’t have is “enough.” They always push for more even though they may live very comfortably for the rest of their lives with the accumulated money they have. We keep moving the goalpost and become miserable while chasing it. Happiness is the results minus expectations. When our expectations are higher than the results, we become unhappy. In the chase to move the goalpost, some people try illegal things because they just want more—becoming stupidly ambitious. In the end, they ruin whatever they have built or accumulated.
The wisdom is to stop moving the goalpost. It’s dangerous always to want more. Build a sense of enough, and it will make you happy and healthy.
Don’t compare yourself with others. As we talked about in the previous chapter, everyone has their own luck & risk situation. If someone is much wealthier than you, don’t get into the comparison game because there is no limit in that game. People like Warren Buffet and Bezos have even vast differences in their wealth that are unimaginable to the majority of the population.
Enough doesn’t mean too little. You have to find what’s enough for you, but it doesn’t mean you shouldn’t be ambitious. Learn your limit and which opportunities you should take because not all seeming opportunities are worth the risk. There are some that you should avoid, no matter the gain. Think about what’s important to you in life: reputation, freedom, family, friends, happiness, love, etc.
Chapter 4: Confounding Compounding
Many don’t realize the exponential impact of sticking to certain things for a very long time. Our brains can’t grasp the exponential impact. Take Buffet; his wealth has accumulated over 75 years, and his $81 billion came after he was 65. But he started investing at age 10. He is skilled in investing, but his secret is time. Compounding works in many ways well. Any skill that is done well over a very long time brings success. It’s just that humans have a hard time understanding (or thinking about) exponential gain in the long term.
A good investment earns pretty good (not necessarily the highest) returns over a very long time. Compounding wins much more than one-off highest returns.
Chapter 5: Getting Wealthy vs. Staying Wealthy
Many people get rich overnight and also lose everything in a short time. Getting rich is one thing; staying rich is another. Keeping the wealth requires frugality and humility. You need to accept that how you got rich can be gone in a day and acknowledge the luck factor. You also need to try not to lose the money constantly. You have to build a survival mindset. With the survival mindset and keeping money, you enable compounding to do wonders for you. Even that means you don’t get the most significant returns all the time; while everyone is getting a lot of returns, you have to keep your focus on the long-term win. For that one, you have to plan with thinking things will not go according to the plan. As the world keeps changing, no plan can survive without adjustment. Nobody can foresee the future. That’s why you have to build a buffer—a margin of safety.
You have to plan with room for error. For that, you have to have a frugal budget, think flexibly, and live happily with an extended range of outcomes. It’s not about conservatism—avoiding risk. It’s about increasing your chances of survival at a given risk. You have to be optimistic about the future but paranoid about what can prevent you from getting there. You need to have a short-term paranoia to keep you alive long enough.
Chapter 6: Tails, You Win
“Tails drive everything.”
In business, finance, or most of the things involving uncertainty, it’s the tail that brings huge success. When you look at Berkshire Hathaway, you see that their fortune comes from their top few investments, the rest of the hundreds are average or loss. That’s also true for businesses. Take Google or Amazon. Amazon introduced the Fire Phone, which was a huge failure. But Bezos said, “We’re working on the next failure.” They can offset these losses with a few tails they have—Prime and AWS. The same applies to finance. You can be wrong half the time and still be rich. A few of your investments succeed, and you become rich. The rest can be average or fail. In fact, they will. Don’t hang up on them too much. Look at the next. Ensure that you don’t bet everything on that failure.
Chapter 7: Freedom
The real richness is how much you have control over your time. All surveys and research about happiness tell nothing about money. It’s the ability to choose what you want to do when you want to do it and whoever you want to do with—having control over your life and time in general.
As our jobs evolved from laboring to office work, we are constantly working (even while not working, we think about work and problems). The freedom to not do that and have control over time is the real happiness. It’s not the money you have, the size of your house. But money can provide you with that freedom. More money doesn’t make you happy, but by using the money as a safeguard, you can free up the time to do whatever you want to do whenever you want to do with whoever you want to do with.
Chapter 8: Man In The Car Paradox
When you spend money to buy a fancy car thinking that people will recognize and respect you, look at you and think that you’re an important person, you’re putting yourself in the wrong place. When people see the car, they look and admire the car, not you. You’re never the topic. They think that one day they will own a car like that and they will be respected. They never think that you must be a very respectful person. The car steals that from you.
Chapter 9: Wealth Is What You Don’t See
Richness is what people always see. It’s the visible part of money. If someone has a Ferrari, we can safely say that they are rich. It doesn’t matter how they can afford it; they have the monthly payment anyway, either at the edge of insolvency or deep down in debt.
The wealth is different. It’s the part nobody sees. That’s why it’s challenging to learn from others. Wealth is the car that hasn’t been bought, the big house that wasn’t moved in. It’s an option not yet taken. Its value lies in the freedom and flexibility of one day purchasing more stuff than you can buy now. Building it is difficult because most wealthy people are also invisible; we can’t learn from them. They might also be rich, but the wealth of the rich is also invisible. Nobody knows Bezos’ portfolio or the opportunities he didn’t take.
Chapter 10: Save Money
Investment returns are mostly out of your control, but your savings rate is. You can build wealth without high income after you cover your minimum life expenses. The value of wealth is relative to what you need. If you keep moving the goalpost, you can’t save. However, if you keep the goalpost constant, you can save whatever is left after you cover expenses. You don’t need to put hours of work into increasing your investment returns from 10% to 12% if you increase your savings from 1000€ to 1200€ (already 20%).
After a certain level of income, the rest is just your ego. How much you tame your ego tells you how much you can save. You can save more and spend less if you desire less. That simple. You also don’t need a specific reason to save. It’s okay to save for retirement, a house, a car, etc. But you don’t have to. You can save money for the sake of saving. In turn, cash gives you flexibility. There is one thing you can’t buy with money is time. If you save money, you build your flexibility muscles. Then you can earn back your time. More savings can help you if you know you don’t like your job; you can quit and take your time to find a new job. You can also just sit on the money to wait for a great option to invest, especially when others who don’t have the flexibility bring the opportunities to you. A while ago, everything was local. If you were the best, you made good money. Now, skill is not enough. Having control over your time and being flexible is the most valuable currency in the world.
Chapter 11: Reasonable > Rational
You don’t have to be perfectly rational in investing. We’re human, not a spreadsheet. As the whole investment system is complex and depends on humans, it’s okay to be just reasonable and realize you can’t win only with numbers. When you do, you have higher chances to stick to your plan in the long run instead of day trading. Investing in a company you love for any reason helps you stick to it when the market is going down. In turn, it helps the company to have capital and stay wealthier in the long run. On paper, it might not make sense to own that company but just because you like it, you keep the share in the difficult times. Once the difficult times are over, it usually pays back if the company’s financials are strong. Being reasonable helps you stay on track when everyone is trying to guess the market in day trade, you can stay strong knowing that it’s impossible to do (as much as day trade benefits look attractive on paper).
Chapter 12: Surprise
Studying history to replicate what worked back then will never work today. As the world is different, industries have changed, how investment is used has changed, and capital allocation and technology have changed. Hence, looking at historical patterns will never work. There is also the impact of big events nobody could foreseen, like World War II, 9/11, the 2008 crisis, etc. Every time these events were happening for the first time. All of them started/happened with a tiny event—a tail event that changed the world, moved the needle, and was an outlier. The problem is that we often don’t use these events to guide our thinking when designing future investments. We think that they won’t happen again. True, they won’t, but we’ll always see brand-new ones. So, we have to learn from being surprised, and the world is always surprising. We can’t use past surprises as a guide; we can only expect that we’ll be surprised again, we have no idea what will happen next.
Also, looking at the history to understand patterns is misleading too. We can’t form future predictions using historical data. The structural changes happening all the time, making it impossible to compare today with the past. There was no venture capital money in the 1940s-1950s to do business. There were no tech companies, and there were recessions in varying cadences. Even Benjamin Graham, one of the best investors of all time, changed the formulas in his book in every new version. He admitted that what worked in the previous version wasn’t working anymore. That’s what made him great: not using the same methods but adjusting according to today. History can only help to get the bigger picture, such as psychological patterns and how people behave in certain events when they invest. That’s what we can learn from historical data. But for the rest, we have to be ready to be surprised and plan our money to be ready for unknowns.
Chapter 13: Room for Error
In whatever you do, you have no certainty that everything will go as you wanted or expected. You can plan everything in detail but life will eventually bring you a surprise. To prevent being caught off-guard and being wiped out in a surprise, you must add/think about room for error. We can’t predict the world as black/white; we have to consider gray areas where anything can happen. Any unexpected events can knock down the market 30% in a day/week. If you don’t have any room for error in your investment plan, you might sell everything and lose a lot, which pushes you out of the game completely and you can’t come back at all. You can’t know how the stock prices will be on any day. Volatility is real and its impact is more psychological. If you have no room for error, you can sell everything in a 25% decline in the market.
The same goes for retirement plans. You can’t know what the market will be like. You may retire in the middle of a bear market, leaving you with less money than you anticipated. Your future returns might be lower. If you have no margin of safety, you can’t even retire. OR you might have to use your retirement savings for a medical mishap while you’re 35. The golden rule is building room for error to prevent a single point of failure. If one event can knock you down so that you can’t go back to the game, you have to build a backup of a backup. When you do, you’ll have a chance to wait for the odds to turn in your favor. This can increase the chance of rare good events happening because you were able to stay in the game, or you win from compounding. If you rely on a pay-check every month to stay alive, build a gap between the money that arrives and what you use. The goal is to do what you want, when you want, as long as you want.
Chapter 14: You’ll Change
We make financial (or life) decisions with the mindset that we’ll be the same person in a decade or two. It’s easy for us to see and accept how much we have changed in the past but challenging to realize how much we’ll change in the future. The decisions made in the past define our lives today, and we either abandon them or stick to them without being happy. When we abandon, we interrupt compounding. Instead of choosing either approach, we can seek to find the balance between two ends. And we should strive to avoid the extreme ends of financial planning. Endurance is key here. Instead of living a very frugal life where we don’t enjoy or earn a lot to live in luxury but at the cost of our time, we can find moderate living with moderate savings and moderate time for family and leisure. As we keep changing, that gives us the flexibility to adjust without interrupting compounding or starting from zero in our new decisions that change the direction.
Also, we should aim to accept the reality of changes in our minds. Some people stick to one career just because they studied that. It’s difficult to know what you’ll want in 20 years while you’re still in college. It’s also true now that we do not know what we’ll want in 10 years. Instead, we should accept that we’ll change and not let our future selves become prisoners of our past selves. We need to get rid of sunk costs in our lives.
Chapter 15: Nothing is Free
Many people try to get more money and more returns without paying the fee. The volatility in the stock market is a fee that you cannot avoid. In every investment, every gain, there is a fee. Most often, the fee is invisible but it’s always there. You cannot avoid it. You might try finding ways to postpone it, but eventually, it finds you in the form of a fine. Accept that you’ll pay the fee like in any entertainment center. The cinema costs money, while you can rent the movie at home. You go to the cinema to have the experience and pay the fee. Accept the stock market’s fee (volatility) and be okay with it. If you’re not, you don’t have to get into the stock market and can stay with cash or other forms but your returns will be smaller.
Chapter 16: You & Me
Although everyone is playing in the same field, everyone plays a different game. We call everyone an investor, but a granny investing the retirement money differs a lot from the day trader who optimizes for very short-term wins. Big failures more often come from social influence, people looking at others and imitating their investments, who are playing a different game. If you’re investing in the longer term and read investment advice aimed at the short term, eventually, you’ll fail, or the other side will fail. Both of you can’t win.
Chapter 17: The Seduction of Pessimism
Nobody notices a big change if it happens over 20 years. They are invisible. But if the market goes down 40% in a day, everyone starts bursting out disaster scenarios. This is also what gets attention. People look at warnings and alerts about pessimistic/dramatic scenarios. But if the market grows 200% over 10 years, nobody realizes it. It’s tempting to pay attention to disaster scenarios, but we have to keep an attitude and stay on course even when there is a huge noise outside screaming doomsday.
Chapter 18: When You Believe Anything
When you want to believe in something, you find even more related things to believe. We find exaggerations and stories to move the wish to a bigger extent. Moreover, everyone has an incomplete picture of the world and builds narratives to fill the gaps. The problem is that everyone has a different view and narrative. We focus on what we know and discard what we know. This makes us blind to even discovering them. Especially in economics and investing, the worldview can’t even be complete as it depends on others a lot. We have no clue or possibility to predict what others can think, let alone one person.
