Prelogue

Ronald Read a janiter who made $8mn dollars

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THis is a block quote by raj patel

Read saved what little he could and invested it in blue chip stocks

In the mid-2000s Fuscone borrowed heavily to expand an 18,000-square foot home in Greenwich, Connecticut that had 11 bathrooms, two elevators, two pools, seven garages, and cost more than $90,000 a month to maintain.

Ronald Read was patient; Richard Fuscone was greedy. That’s all it took to eclipse the massive education and experience gap between the two.

One, financial outcomes are driven by luck, independent of intelligence and effort. That’s true to some extent, and this book will discuss it in further detail. Or, two (and I think more common), that financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.

Author: My own appreciation for the psychology of money is shaped by more than a decade of writing on the topic. I began writing about finance in early 2008. It was the dawn of a financial crisis and the worst recession in 80 years.

To grasp why people bury themselves in debt you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism.

Chapter 1: No One’s crazy

People do some crazy things with money. But no one is crazy. Here’s the thing: People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons.

In theory people should make investment decisions based on their goals and the characteristics of the investment options available to them at the time. But that’s not what people do.

The economists found that people’s lifetime investment decisions are heavily anchored to the experiences those investors had in their own generation— especially experiences early in their adult life.

“Gross admits that he would probably not be where he is today if he had been born a decade earlier or later

Not intelligence, or education, or sophistication. Just the dumb luck of when and where you were born.

Chapter 2: Luck and Risk

But both are so hard to measure, and hard to accept, that they too often go overlooked. For every Bill Gates there is a Kent Evans who was just as skilled and driven but ended up on the other side of life roulette.

If you give luck and risk their proper respect, you realize that when judging people’s financial success—both your own and others’—it’s never as good or as bad as it seems.

Say I buy a stock, and five years later it’s gone nowhere. It’s possible that I made a bad decision by buying it in the first place. It’s also possible that I made a good decision that had an 80% chance of making money, and I just happened to end up on the side of the unfortunate 20%. How do I know which is which? Did I make a mistake, or did I just experience the reality of risk?

Countless fortunes (and failures) owe their outcome to leverage.

The more extreme the outcome, the less likely you can apply its lessons to your own life, because the more likely the outcome was influenced by extreme ends of luck or risk.

Chapter 3: Never Enough

The question we should ask of both Gupta and Madoff is why someone worth hundreds of millions of dollars would be so desperate for more money that they risked everything in pursuit of even more.

• The hardest financial skill is getting the goalpost to stop moving.

• Social comparison is the problem here.

• “Enough” is not too little.

• There are many things never worth risking, no matter the potential gain.

Chapter 4: Confounding and Compounding

Why ice ages occures several times? in repeatation?

Moderately cool summers, not cold winters, were the icy culprit. It begins when a summer never gets warm enough to melt the previous winter’s snow. The leftover ice base makes it easier for snow to accumulate the following winter, which increases the odds of snow sticking around in the following summer, which attracts even more accumulation the following winter. Perpetual snow reflects more of the sun’s rays, which exacerbates cooling, which brings more snowfall, and on and on. Within a few hundred years a seasonal snowpack grows into a continental ice sheet, and you’re off to the races.

The big takeaway from ice ages is that you don’t need tremendous force to create tremendous results.

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.

His skill is investing, but his secret is time. That’s how compounding works. And so when we are studying why something got to become as powerful as it has—why an ice age formed, or why Warren Buffett is so rich—we often overlook the key drivers of success.

Jim Simons, head of the hedge fund Renaissance Technologies, has compounded money at 66% annually since 1988. No one comes close to this record. As we just saw, Buffett has compounded at roughly 22% annually, a third as much. Simons’ net worth, as I write, is $21 billion. He is—and I know how ridiculous this sounds given the numbers we’re dealing with—75% less rich than Buffett. Why the difference, if Simons is such a better investor? Because Simons did not find his investment stride until he was 50 years old. He’s had less than half as many years to compound as Buffett. If James Simons had earned his 66% annual returns for the 70-year span Buffett has built his wealth he would be worth—please hold your breath—sixty-three quintillion nine hundred quadrillion seven hundred eighty-one trillion seven hundred eighty billion seven hundred forty-eight million one hundred sixty thousand dollars.

The danger here is that when compounding isn’t intuitive we often ignore its potential and focus on solving problems through other means. Not because we’re overthinking, but because we rarely stop to consider compounding potential.

But good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.

Chapter 5: Getting wealthy vs. Staying wealthy

But there’s only one way to stay wealthy: some combination of frugality and paranoia.

If I had to summarize money success in a single word it would be “survival.”

Not “growth” or “brains” or “insight.” The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. This should be the cornerstone of your strategy, whether it’s in investing or your career or a business you own.