I recently finished reading the book "The Psychology of Money" and I hope to share my gains in this article. It wasn't until this year that I began to truly realize from my heart that I needed to study. If a person doesn't realize something from his heart, no matter how much others say, it's useless. This awareness may be a failure and hit a wall, or it may be an improvement in cognition.

No one really loses their mind about money

People’s view of money is formed during their growth, but for people in different eras, the world during their growth may be different. If a person grew up in an environment of inflation, he would be more willing to invest in bonds. If a person grew up in an environment of booming stocks, he would be more willing to invest in stocks. An idea that is intolerable to one group of people may be perfectly reasonable to another group of people.

An example is that workers at Foxconn used to sell their bodies to make a living before going to work at Foxconn, but Foxconn provides them with a good life without selling their bodies and dignity. So what others see as a sweatshop may be salvation for some.

Risk and Luck

Risk and luck are like twin brothers. Many times, other people's successes and failures are not as glamorous or as bad as we imagine. It is actually difficult to accurately calculate how much luck is involved in our success and how much random risk we take in our failures.

Let's give a simple example: Give 1 million people each an initial capital of 10,000 yuan to play a completely random game. Each game has a 50% probability of doubling the capital and a 50% probability of losing it all. After playing 14 consecutive games, theoretically, on average, about 61 people will have assets of more than 100 million.

Objectively speaking, this is a game that relies entirely on luck. But if you happen to be one of those 61 people, do you really think that your success is just luck? Instead, many people believe that they have made the right choice or have some kind of judgment. This shows that people can easily mistake random results for their own abilities.

Similarly, we often make different attributions for results: others' failures are attributed to wrong decisions; our own failures are attributed to risks and circumstances; others' successes are attributed to luck; our own success is attributed to ability and correct decisions.

In fact, most results are not caused by a single factor, but are the result of a combination of ability, effort and random factors. Maintain this understanding and neither become overly conceited because of success nor overly deny yourself because of failure.

Saving money

The most important reason to save money is that you can have absolute control over your time. The source of people's happiness is not a bigger house, a better car, or a higher income, but the sense of control they have over their own life.

When a person has enough savings, he is no longer completely dependent on the next salary, can refuse a job he doesn't like, can choose to rest, study, start a business, or spend more time with his family. What money really buys is not more items, but more choices, and choices ultimately bring control over time.

By saving money to gain financial freedom, you can regain control of your time. But it’s still the same. Saving money is something everyone will tell you. If you don’t truly understand its meaning, you won’t practice it.

Getting rich and staying rich

Getting rich and staying rich are two completely different things.

Getting rich requires a sense of adventure, optimism, and the courage to take a chance. Because if you want to achieve wealth well above average, you often have to bear higher uncertainty.

But staying rich is just the opposite.

Preserving wealth requires humility and awe. You must admit that your success does not come entirely from ability, but it must include time, opportunity and luck. Also understand that money can go away as quickly as it comes.

Therefore, the goal of staying rich is not to make the most money, but to avoid making big mistakes that can destroy your wealth.

You may miss some gains in the bull market because you are more conservative; but in the bear market, you can effectively control the retracement. In the long run, losing less money is often more important than making more money.

Luxury Car Paradox

Many people work hard to make money in the hope of gaining respect, recognition and envy from others through wealth. But reality is often not the case. When others see your luxury car, mansion or luxury goods, what they really think about is not "I respect this person", but "I want to have such a life." What people envy is actually what they want to be, not the wealth owner himself. Real wealth is often not something that can be displayed. Luxury cars, mansions, and famous brands are all just money that has been spent; real wealth is those assets that are invisible to others, still quietly lying in your account, and continue to create future options for you.

The greatest value of wealth is not to show it to others, but to give yourself more freedom.

Savings rate

Increasing the savings rate is far more than pursuing a higher investment rate of return. The accumulation of wealth not only exists in your investment rate of return, but also in the efficiency of your spending. A person's investment return rate may be higher than yours, but if you are more efficient in spending money, and your life requirements will not increase as your wealth increases, then you will have a higher savings rate, and a high savings rate can bring higher compound interest income. Improving your savings rate may be achieved by buying one less drink or eating out for one meal less, but a 0.1% increase in return on investment may be the result of countless hours spent by professionals.

Compound interest income = Savings rate If desires do not continue to expand with income, then most of the increase in income will be converted into savings, and the savings will continue to be invested, forming greater compound interest.

After the income reaches a certain level, a person's consumption comes more from desires rather than needs. If desires do not continue to expand with income, then most of the increase in income will be converted into savings, and the savings will continue to be invested, forming greater compound interest.

After understanding this truth, we can understand why Munger's last will and testament was that ordinary people should buy the S&P 500 instead of the Nasdaq 100. Although based on historical data, the annualized return of Nasdaq is 13%, while the annualized return of the S&P 500 is only 10%. The 30-year compound interest gap of 3% will be very large. If you invest 1 million at the beginning, Nasdaq will reach 39.18 million in 30 years, while the S&P will only have 17.45 million, which is almost double the gap. If we invest 1 million in 30 years, the gap will still exist. The Nasdaq will be 12.2 million and the S&P will be 6.3 million. So since there is such a big gap, why does Munger still recommend the S&P?

Nasdaq’s higher returns come with greater volatility. When the market experiences a sharp retracement, what most investors are really dealing with is not math, but their emotions. Many people sell their stocks early when the market falls, not because their investment targets are not good, and ultimately fail to enjoy long-term compound interest.

In comparison, the volatility of the S&P 500 is relatively small, making it easier for investors to stick to long-term holdings.

For ordinary people, an investment strategy that can persist for thirty years is often more important than a strategy that theoretically has a higher rate of return but cannot persist.

At the same time, if the savings rate can be continuously increased and the annual investment amount is increased, the gap between different investment returns can also be significantly narrowed.

What really determines long-term wealth accumulation is often not the pursuit of the highest rate of return, but persistence in investing and saving at a reasonable rate of return, and compound interest over a long enough period.

Different people play different games

People like to ask successful people for investment experience and then copy their methods, but rarely think about whether they are in the same situation. There is no absolutely right way to invest, only the way that suits you. Age, income, family responsibilities, and risk tolerance will all affect investment decisions, and one of the most influential factors is the investment period. For those who plan to invest for thirty years, it is not that important whether a company's stock price rises or falls today. They are more concerned about whether the company can continue to create value in the future; but for traders who invest for a day, a week, or even a minute, they only care about whether the stock price will rise during this period. Therefore, the same company may be worth completely different things to different investors because they are not playing the same game at all.

Of course, stocks won't rise forever, but as long as a financial asset has been rising for a period of time, there will be a growing number of short-term traders who believe that this upward trend will continue. For them, it doesn't matter how much the stock is really worth. As long as there are still people willing to buy at a higher price, they have a chance to make a profit. As more and more people buy because of the rise, more buying pushes the price to continue to rise, thus forming a cycle that continues to strengthen itself. This does not mean that the stock actually becomes more valuable, but that market participants start to behave the same way based on different logic. The real danger is that when long-term investors also start to invest using the logic of short-term traders, no longer focusing on corporate value, but begin to believe that "this time is different," bubbles often slowly form at this time.

Therefore, figuring out what kind of investor you are is more important than learning which investment method.

If your goal is to accumulate wealth in a few decades, then it doesn’t make much sense to watch the rise and fall of the stock price every day; if your goal is short-term trading, then the value of the company in ten years is not your biggest concern.

Historically, the longer the time, the easier the market is to predict; the shorter the time, the higher the uncertainty.

Human society as a whole has been developing continuously over the past few hundred years. Therefore, in the long run, the probability of high-quality companies continuing to create value is much higher than destroying value; but if the time is shortened to today, this hour, or even the next minute, no one can accurately predict whether Apple's stock price will rise or fall.

Therefore, don’t copy other people’s investment strategies easily. What really matters is not how much money someone else makes, but whether his investment approach fits your time, goals, and risk tolerance.

Tail Victory

It’s easy to think that success means that most decisions must be correct. But in fact, in the business and investment world, this is not the case.

Even if you are right only half the time and wrong the other half, you can still achieve great success. The reason is that it is not the average that really determines the results in these fields, but the tail events. The so-called tail events are events that have a very low probability of occurring but can have a huge impact.

According to Correlation Ventures’ statistics on more than 21,000 entrepreneurial financings from 2004 to 2014:

  • 65% were losses
  • 26% achieved a return of 1-5 times
  • 5% Obtained a return of 5-10 times
  • 2.5% Obtained a return of 10-20 times
  • 1% Obtained a return of more than 20 times
  • 0.5% Obtained a return of more than 50 times

This means that most investments will eventually lose money. However, just a few extremely high-return projects in a portfolio can be enough to cover a large number of failures and lead to overall profitability. Even if calculated based on the lowest return in each range, these investments can still achieve an overall return of approximately 1.21 times. What venture capital really relies on is never a high winning rate, but a few tail events.

The same goes for the stock market. About 40% of the companies in the Russell 3000 eventually fail, but only about 7% generate enough gains to offset the losses of other companies and drive the overall market higher over the long term. The internals of these successful companies also follow the law of tail events. A company may try hundreds of products or projects, but often only a handful of them really change the company's destiny. Apple has launched many successful products, but the one that truly established its position today is still the iPhone.

The reason why tail events are counterintuitive is that we often see only success, but not the countless failures behind success. Behind a successful movie, there may be dozens of works that no one cares about; behind a great company, there may be countless failed projects; and an excellent investment institution may also have experienced a large number of zero investments. People always infer the process based on the final success, but they ignore that it is often only a few key events that really determine the outcome.

Understanding tail events is not to let us chase miracles, but to remind ourselves: Don’t deny a correct method because of several failures, and don’t overestimate your ability because of one success.

Summary

After reading this book, my biggest gain is not that I learned a certain investment method, but that I re-understood wealth. I have experienced the days of currency speculation in 2020. Although I made money in the end, I hardly slept peacefully for a day during the whole process. Virtual currencies are traded 24 hours a day. The first thing you do when you wake up every day is to look at the price. You are afraid that your account will be cut in half when you wake up. Looking back now, I didn't really understand what I was buying. What I pay attention to every day is other people's news, market sentiment, and whether the next wave will continue to rise. Later I realized that the money I earned did not entirely come from ability, but a large part was just because luck was on my side. If the market had not continued to rise at that time, I would most likely have returned the money I earned to the market like everyone else.

"The Psychology of Money" made me understand that what really matters is not making money the fastest, but being able to stay in the market. Wealth is never a sprint, but a marathon that lasts for decades. Saving money is to have more choices; investing is to allow wealth to grow over time; keeping wealth is to prevent one mistake from destroying all previous efforts. In the past, I always thought about how to make more money. Now I am more concerned about how to sleep more peacefully. Because real wealth is not the number on your account, but whether it really gives you more freedom when you have it.