Summary of The Psychology Of Money PDF
The biggest threat to building long-term wealth isn’t a lack of technical knowledge or investment skills but it’s our own psychology. People with no financial background can achieve those results than those with a financial background and can become very smart about their finances by educating themselves.
Suppose we have two individuals, Ronald Reed and Richard fusicon. One of them was a janitor car mechanic all his life and the other was ivy league, a financial expert. One of them was patient while the other was greedy. One of them died worth eight million dollars and the other one was forced to sell all his belongings. Ronald Reed worked as a gas station attendant. Mr. Reed made an average salary of 29000 dollars per year after he worked for 42 years. He would have made 1.2 million dollars assuming he needed 20 to live because he was a very frugal person which would leave him 970,000 at the end of his lifetime.
The book does not advocate to be like Mr. Reed but there is a lot of great advice on the art of investing. The only thing that is certain in investing is the compounding effect. It’s very few scientific rules that you can count on when you invest your money. The rest is basically random noise driven by the cumulative psychological states of all market participants all having different backgrounds and intentions with their positions.
If you don’t know what the compounding effect is in short it is a rule of nature just like marginally colder summer due to incremental change of the earth’s orientation toward the sun leads to just a small layer of snow more making it through summer increasing the insulation of the layers underneath repeating year over year leads to the formation of continental ice sheets resulting in a global ice age.
The rule of the book is that you should invest your money. Don’t keep it in your bank account. You don’t need to be a financial genius in the game. Knowledge doesn’t seem to play an important role in your own psychology which this book nicely illustrates. Apart from the compounding effect, you have total control over is your saving rate. The more you save the faster the compounding wave will carry you to your financial goals.
Key points From The Psychology Of Money Pdf
People from different backgrounds have different experiences. They see the world differently. They have different ideas about what money is and how it is to be used. Opinions on lottery tickets and sweatshops are prime examples of different views. People who don’t have a lot of money are more likely to buy a lottery ticket than people who do have a lot of money because it is the only way they can dream of achieving a financially comfortable life.
Luck and risk are both the reality that guides every outcome in life. But both are so hard to measure and accept that they too often go overlooked respecting their help to realize that judging realize financial success is never as good as bad as it seems.
Identifying the traits we should emulate or avoid in successful people is hard to do. Learning by imitating others is not a way to success. Many fortunes are based on leverage and overworking employees. Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
When successful realize that things are not as good as you think. When you fail don’t think your decisions were terrible. Sometimes they just reflect the unforgiving realities of risk.
Rajat Gupta a wealthy businessman born into poverty committed fraud to gain quick money. He ended up in prison. His previous business success by his thirst for riches. Berne Madoff followed a similar fraudulent path and ended up in jail. Rich people did fraud to get the money they didn’t have and didn’t need. Always remember that you don’t need to risk when you have and need for what you don’t have.
Things like family, happiness, reputation, freedom, and independence are never worth risking no matter the game.
People measure their well-being against their peers. People measure their well-being against their peers but you must accept that you might have been enough and not compare yourself to others.
Warren Buffet is the richest investor ever and his success comes from the long time he spent in investing. He started small at a very young age and continued accumulating relatively small annual gains. He only retired when he turned sixty. This period is the key to his riches. This technique is called compounding. The counter-intuitiveness of compounding may be responsible for many financial disappointments. Investing isn’t about earning the highest return in a short period of time. It’s about earning good returns that can be repeated over a longer period of time.
We all want to be happy. Happiness is complicated but it has a shared universal element having control of one’s life. The USA is the richest nation in history but Americans aren’t much happier than they were in the past. This is because its people are stressed out because it has the most managerial jobs. These are jobs where they are expected to think of all the time even after the workday is gone.
Compared to the previous generation control over your time had diminished. It shouldn’t be surprising that people don’t feel much happier than even though on average people are richer than average. Times remain the biggest dividend. Money has to offer.