This post is part of the 📖 The Psychology of Money series.
Today, I am reading Room for Error chapter from the book The Psychology of Money: Timeless lessons on wealth, greed, and happiness written by Author, Morgan Housel.
Doing well with money isn’t necessarily about what you know. It’s about how you behave. And behavior is hard to teach, even to really smart people.
In The Psychology of Money, award-winning author Morgan Housel shares 19 short stories exploring the strange ways people think about money and teaches you how to make better sense of one of life’s most important topics.
Room for Error
The most important part of every plan is planning on your plan, not going according to plan.
The wisdom in having room for error is acknowledging that uncertainty, randomness, and chance — “unknowns” — are an ever-present part of life.
The only way to deal with them is by increasing the gap between what you think will happen and what can happen while still leaving you capable of fighting another day.
People underestimate the need for room for error in almost everything they do that involves money.
Stock analysts give their clients price targets, not price ranges.
Economic forecasters predict things with precise figures, rarely broad probabilities.
The pundit who speaks in unshakable certainties will gain a larger following than the one who says, “We can’t know for sure” and speaks in probabilities.
“The best way to achieve felicity is to aim low” — Charlie Munger.
The idea is that you have to take the risk to get ahead, but no risk that can wipe you out is ever worth taking.
The ability to do what you want, when you want, for as long as you want, has an infinite ROI.
You have to survive to succeed.
That’s it for today. Tomorrow, we will read the next chapter You’ll Change, where we know long-term planning is harder than it seems because people’s goals and desires change over time.
No One’s Crazy
Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.
Luck & Risk
Nothing is as good or as bad as it seems. More important is that as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves and leave room for understanding when judging failures.
There are many things never worth risking, no matter the potential gain. Knowing when you have “enough” is an invaluable skill. Building a sense for “enough” is remarkably simple: Stop taking risks that might harm your reputation, family, freedom and independence.
Don’t forget that being loved by those “whom you want to love” is invaluable than risking everything for money.
Good investing isn’t necessarily about earning the highest returns. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time.
Getting Wealthy vs Staying Wealthy
Good investing is not necessarily about making good decisions. It’s about consistently not screwing up. 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.
Getting money is one thing. Keeping it is another. If you have to summarize money success in a single word, it would be “survival”.
Tails, You Win
Gains come from a small per cent of your actions called “Long Tail Events”. You can be wrong half the time and still make a fortune. Remember, tails drive everything. Just do the average thing when all those around you are going crazy.
Controlling your time is the highest dividend money pays. The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.
Man in the Car Paradox
If respect and admiration are your goals, be careful how you seek them. Humility, kindness, and empathy will bring you more respect than horsepower ever will.
Wealth is What You Don’t See
Wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you choices, flexibility, and growth to one day purchase more stuff than you could right now.
Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you.
Reasonable > Rational
You’re not a spreadsheet. You’re a person. A screwed up, emotional person. When it comes to investing, try to be reasonable rather than rational.
Don’t rely solely on history when predicting the future of the economy and stock market.
Room for Error
People underestimate the need for room for error in almost everything they do that involves money. The solution is simple: Use “room for error” when estimating your future returns.
Buy or not to buy
If you want to be wealthy and then stay at the totem pole forever, you must immediately read this book. I bought several copies of this book to gift friends and family. It’s an easy read with a lot of anecdotes and real-life lessons. I already implemented several hacks in my life whistle taking investment decisions.
Author(s): Morgan Housel
Part 15 of 23 in the 📖 The Psychology of Money book series.