Investment Tips that I couldn’t find on CNBC
I have been keen on investment and diversification for the past 8 years now. I thought I knew all about it being raised amongst a family and friends full of finance experts. But this book really expanded my perspective on how I look at my investments now. Here’s my summary of the book Psychology of Money: Attitude towards Money Everyone has a different attitude toward money The author explains this with a stock market example. S&P 500 is an index fund that tracks the top 500 US companies. The value of this index remained somewhat constant from the year 2000 to the year 2011. But its value almost tripled in the next decade A person who has seen the 2000–2011 decade as their primary investment decade, would have a different opinion compared to the person who has seen the 2011–2021 decade as one. Don’t underestimate the importance of luck when it comes to making money Money = Luck * Skill * Unfair Advantage Bill Gates — the Microsoft founder, for example, who is an incredibly hard and smart worker, also happened to go to one of the very few schools that actually owned a computer. He already had a headstart with coding when people were trying to get their hands on the computer. Don’t look too closely at an individual and try to imitate them, because the luck factor does come in which won’t be the same for any two people. Who knows that there were 9 other Bill Gates-like talents born in the year 1955 but they never got to go to school, let alone able to tinker around with computers. Learn to say enough It is easy to get intimidated by others’ goals while we are working on our own. Everyone’s fighting their own struggle and all of us come with our own societal biases. I am going to take a personal failed example, I started off as a Mechanical engineer and graduated with a great RnD job at my dream car manufacturer. Since then my remuneration has significantly increased, but still, I don’t think I am anyway close to the point when I can call it enough. The author says that if we want to live a peaceful life ahead we need to define a point where we can safely stop pursuing growth defined by a moving target. Quote from the book — “There’s no reason to risk what you have and what you need, for what you don’t have and don’t need.” This really inspired me in the recent past, when I started my little Airbnb thing at my house for subletting spare rooms. For a few weeks, I was doing all the services from booking management to preparing the rooms myself. That was the time when I was reading this book, and it clicked to me — that I don’t need to devote my time to this kind of service when I can hire a professional to do this for a few extra hundred dollars, and I can focus my energy to what I am passionate to do. Getting Money Appreciate the value of compounded interest If you are reading this post, you probably know who Warren Buffet is. At the time when this book was written, Warren Buffet’s net worth was 84.5 billion dollars, out of which 84.2 billion dollars actually came after his 50th Birthday. And 81.5 billion dollars of it came after the 60th Birthday. In summary, 99.9% of Warren Buffet’s earnings came from just compound interest. So for all those who want to retire as a billionaire and finding it hard to do it, don’t give in yet — you have compounded interest as your superpower to reach there. So just hang in there and keep doing sensible investing. Try to save as much as you can even when you don’t have any reason to save. This is how the author defines savings: Savings = Income — E̶̶̶x̶̶̶p̶̶̶e̶̶̶n̶̶̶s̶̶̶e̶̶̶s̶̶̶. Ego Maybe just look around and see where all your spending went in the recent past and think how much of that is actually a necessary expense and how much of that is just out of pure ego. Savings is something you have in your control. No one can predict stock futures or crypto futures (at least in the short term) but you can definitely predict how much you can save. There’s a saying “ A person doesn’t get wealthy by how much money he/she makes but by how much of it he/she saves.” High savings% and low expenses% is what that will give you freedom in life, irrespective of what you earn on absolute terms. Focus on not getting screwed up, rather than making big gains This lesson reinstates the common saying of consistency in buying the well-reputed index funds, compared to day-trading individual meme stocks and trying to time the market. In stock investments, getting it wrong is a lot worse than getting it not right. If you sell a particular stock at its lows and that stock rises back again — then we neither have liquid cash nor the stocks. But if your stock value goes down and you didn’t sell it then it does have a potential to go up at least. So next time when you see a Game Stop stock or Dogecoin going up, stay a foot away from it. Spending Money Use the money to buy freedom “Money’s greatest intrinsic value — and thus can’t be overstated — is its ability to give you control over your time. Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with.” At the end of the day, we want a happy life, whether it is under a $10k house roof or under a $10M house roof. Studies have shown the applicability of the law of diminishing returns of happiness on our income after a certain value. This value is well below $100k/year. In short, that means if you increase your family income more than this amount, your happiness level is no longer dependent on it. Getting wealthy is very different from staying wealthy “Getting Money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risks. It requires humility, and fear that what you’ve made can be taken away from you just as fast.” Based on our age and other circumstances, we should define our risk appetite and manage our investment portfolio accordingly. For example, you can choose a different percentage of your portfolio between bonds/ equities (the latter being more volatile) according to your state in life. Don’t be a flashy twat “You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does — Especially from the people you want respect and admiration from.” When people see some exclusive expensive cars/things, they almost never admire the person who drives that or owns them, instead they admire just the thing in itself. Always remember that true wealth is actually the money not spent. Protecting Money Leave room for error You should be able to survive (physically and emotionally — by not living a miserable life) if something bad happens to some of your investments. We should always have emergency funds that will get us through thick and thin of economic downturns. Financially, it obviously makes more sense to rather invest that money and get equity gains (gains — which is typically a more likely scenario), but emotionally — for a peaceful mind it is sensible to have your 1–2 years of expenses saved up as a liquid emergency fund. Avoid Extreme Financial commitments for your future self There is a commonly accepted belief that humans are great at predicting the short-term future but very bad at predicting the long-term future. I am sure you can probably take out at least one single thing from your life that you are doing right now, but you never could have imagined doing it five years earlier. So don’t think that you’d never own a home or will never plan a child and you won’t bother saving up for it. Life is long, things can change! Be reasonable rather than rational Humans are emotional creatures with emotional needs and not an assembly line robot that is optimized for throughput (number of items produced per day). The author says one of the reasonable things to do is to pay off the mortgage for your residential property. This is in no way close to the expected financial advice, as you can use that money to invest in the stock market which would have given returns much more than mortgage interests. But it won’t give you peaceful sleep at night. God forbid for any reason you are not able to pay your mortgage, you’d still have your house if you have no pending mortgage left on it. That is all. I hope you can benefit from at least one of these rules in your investment journey.