#576: Morgan Housel — The Psychology of Money, Picking the Right Game, and the $6 Million Janitor

The way to become a great investor is to maximize the amount of dollars you accumulate over the course of your life. Most of the time, it is not earning the highest returns.

For example:

• Warren Buffett is the wealthiest investor of all time.
• Jim Simons the greatest investor of all time in terms of long term average annual returns.

Warren Buffett’s long term average annual returns are about 21% per year. Jim Simons’ are like 66 % per year. Yet, Warren Buffett is wealthier because has been investing for much longer.

Cope’s rule states that organisms get bigger over time. But there are huge downsides to being big. There’s always a sweet spot in evolution.

When something becomes too big to manage, it can cause you to fail.

Most people want independence and autonomy. Having the money that you don’t have to spend becomes the most valuable thing in the world when it lets you gain control of your time.

But freedom and autonomy carry a lot of responsibility with them. 

Risk is just the odds that something will prevent you from achieving your goals. Everyone has very different goals and aspirations and time horizons, so everyone thinks about risk differently.

If your goals lie 50 years in the future, you probably wouldn't care what will happen in the next three years. But if you're 90 years retired widow on a fixed income, you'd have a very different definition of risk. 

When people argue with each other on risk, it's really people with different risk tolerances and different time horizons talking over each other.

There are many things in finance that look smart and sound smart, and the numbers add up, but it's completely opposed to how the real world works.

Then there are many things that investors do that are not rational but is perfectly reasonable and align with how people's heads work. 

For example, people own stocks that are closest to where they live. People who live in America only own US stocks, and those in Germany only own German stocks. It's not rational, but it's very reasonable. It's easier to invest your life savings in companies you're most familiar with.

Buffett has a great quote on wealth where he says he wants to leave his kids enough money that they can do anything, but not so much money that they could do nothing.

Give children a safety net, but not fuel. Parents shouldn't give their children money just to make their life better. Children need to know that they have to make it on their own.