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30 Rules from Morgan Housel
30 Rules of the Money Game
Earlier in the week I went for a run and put on Morgan’s podcast.
The level of wisdom on the podcast was impressive. I found myself stopping and writing down some quotes on my phone mid-run.
After I finished my 40 kilometres (just kidding), I decided I should sit down properly and listen to it over again, this time taking notes on the whole thing.
What you find below is the result. After about 1 month of getting into the weeds of company reports and crunching some numbers, I felt now would be a good time to take a step back from it all and remember the forest from the trees. I think all investors can benefit from Morgan’s 30 rules (he’s a great investor himself).
I haven't used block quotes because I believe it enhances readability when everything you read is presented directly from Morgan's words.
I want to make it clear that I take no credit for the wisdom shared below – all credit goes to Morgan (thanks for sharing, mate).
I may have incorrectly captured a sentence or two. Please attribute mistakes to me.
Hope this is useful. I’ve made a note to review this one quarterly.
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"When you first study a field, it seems like you have to memorise a zillion things. You don't. What you need is to identify the 3-5 core principles that govern the field.
The million things you thought you had to memorise are various combinations of the core principles."
Rule 1: Read fewer forecasts, but more history
History shows you people tend to get hit by surprise a lot.
Rule 2: Money’s greatest value is to give you independence over time
The money = more stuff mindset is nothing compared to having full control over your time.
Another way to think of this is that every dollar you save is a peace of your future you own, and every dollar you go into debt for, means someone else owns a piece of your future.
Rule 3 : The only way to build wealth is to have a gap between your ego and your income
Another way to say this is nobody is thinking about you as much as you are.
Rule 4: On Bullshit
There’s an optimal amount of bullshit in life, you can’t completely get away from bullshit, even with all the wealth in the world.
Just accept it, and go on with it.
Rule 5: The Bullshit detector rule
A lot of bullshit comes from well meaning people in a situation with poor incentives.
Think about it this way:
How many people are evil Vs How many would be willing to do something evil if they were incentivised to do so.
Having a good bullshit detector is a crucial skill.
Rule 6 : Most Financial debate is people with different horizons talking over each other
Everybody in finance is making a bet about some unknown future.
Arguments happen because people don’t factor this into consideration when they view things differently to the person their interacting with.
Rule 7 : There’s no believing in risk without my believing in luck
They are the same thing, but in opposite directions.
Both are simply an acknowledgement of things outside of your control can have a bigger impact on the outcome than anything you do on your own.
Rule 8 : Save like a pessimist, invest like an optimist
You need both of these in equal parts to do well over time.
Most investors want to answer the question; how can I earn higher returns?
The real question you should answer is (perhaps one of the most important questions in investing): What are the best returns that I can earn for the longest period of time?
Sub-rule: Nothing too good, or too bad, lasts indefinitely
The side effects of a trend erode that very trend
When there are no recessions become confident
When they become confident, they take risks
When they take risks, you get recessions
It’s the lack of crashes that plants the seed for the next crash.
When there’s a crisis, people get motivated.
When people get motivated, they try to solve problems
When they solve problems, crisis ends
Rule 9: Having no fomo, could be the most important financial skill
Dwight D. Eisenhower used to quote Napoleon, and use to say : “ a military genius is the man who can do the average thing when everyone else around him is losing his mind”
Fomo is recklessness masked as ambition
There’s this great quote by Charlie Munger where he says: “Somebody is always getting richer than you, and that is not a tragedy”
Rule 10: If you’re expectations grow faster than your income, you will never be happy
Wealth is growing you income, but keeping your expectations in check
All the financial services industry focused on the first one, and yet there seems to be a no focus on the second part of this equation.
Being never satisfied means taking more risk, and working longer hours, until this catches up on you.
Rule 11: There is rarely more or less economic uncertainty, there are only changes in how people are ignorant people are to risks
Studies have tried to track economic uncertainty. These studies show that the most amount of certainty we had in the world peaked in 2 periods. Right before 9.11, and right before the 2008-09 financial crisis. This clearly shows we were oblivious to these enormous risks we were staring at.
Asking what the biggest risk is, is like asking what you expect to be surprised about.
If you knew it, you would do something about it, but you can’t.
Risk is what’s left over when you think you’ve thought of everything.
Rule 12: An extreme adherence to any investing strategy is dangerous in a world that changes all the time
Benjamin Graham’s Intelligent Investor was updated 4 times.
In every edition, the formulas would change.
Jason Szwag wrote about this, very evidently, that there’s a short shelf life on things that work.
Rule 13: There are few universally right answers in finance, there are only a lot of shades of gray
Finance arguments happen because people get upset at not wanting the same things
The single most important decision you’ll make in your life is whether, when, and whom to marry.
That topic is never taught in schools. One reason for this is because it’s so difficult to teach about a topic for which so many people have differing opinions.
Rule 14: Pessimism always sounds smarter than optimism
That’s because optimism sounds like a sales pitch.
And optimism sounds like someone trying to help you
It pays to be a long term optimist
There is a historian named Deirdre McCloskey who’s got this quote that says “For reasons I have never understood, people love to hear that the world is going to hell”
Rule 15: Most of what people call conviction, is nothing but a wilful disregard for new information that might make you change your mind
When beliefs become dangerous is when you have a brick wall that does not let in counter examples.
Cognitive dissonance is hard because its painful.
Charlie Munger says “You can only have an opinion, when you can state the other side’s position as well as they can”
Rule 16: Your willingness to believe a prediction is influenced by how much you want of need that prediction to come true
People do this with relationships, careers, their investments, and political views.
Anything forward looking is subject to being swayed by your desire to have a pleasant life.
An ironic example of this is when people will believe a forecast with an abysmal track record who will say what they want to hear.
Rule 17: Everybody belongs to a tribe, and underestimate how impactful that tribe is on their thinking
Tribes are everywhere. Your country, state, political party. Investing style., schools, majors, etc.
Tribes have rules and ideas and are supported because they are part of the tribe.
Rule 18: Most financial mistakes come when you try to force things to happen faster than they should
Investing in the stock market is great
Investing and demanding that your money double in the next two weeks is not great.
Compound interest does not like it when you try to use a cheat code.
It’s so easy to underestimate how much time is needed to put the odds of success in your favour.
Financial history will tell you it takes 5-10, 20 years to put the odds of success in your favour.
A lot of people are making good decisions, but are simply not giving these decisions enough time to pay off.
Rule 19: There are the 3 types of hedges one can have
Being more patient
Only the last one do you actually have a fighting chance at.
Rule 20: The goal of investing is not to minimise boredom, it is to maximise returns
So much of what happens in the financial media is done for entertainment. Just like sports, it is designed to entertain you.
People are turned off by simplicity because it’s simply boring.
Money is one of the only fields in life where simplicity tends to equal better results.
This isn’t true in sports. You don’t get ahead in sports by doing nothing. You should train a lot. This isn’t true in finance, it tends to be the opposite in finance.
So many highly intelligent people in the field can’t do this, because it feels like a waste of their resources.
Rule 21: Your personal experiences make up 0.0001% of what has happened in the world, but maybe 80% of how you think the world works
We are all prisoners of our own experience.
When and where you were born can have a bigger outcome in your life that anything you do intentionally.
Rule 22: All investing ability is unproven, until it has survived a disaster
One of the reasons to admire people like Warren Buffet, even Geoge Soros, is not because of the magnitude of their returns, but rather that they have earned money during so many different market cycles.
Both of these people have done it for 50+ years. During high-inflation, low-inflation, during booms, during busts.
Rule 23: Past success always seems easier than it was, because you now know how the story ends
You can’t un-reminder what you know today, when you think about the past.
It is easier to quote Warren Buffet, than actually do what he does.
In hindsight, everything seems easy. The only reason why its easy is because you now know the outcome.
Every past market crash looks like an opportunity, every future one looks like a risk.
Rule 24: We are bad at imagining how change will feel, because there’s no context in dreams
Everybody’s got a high risk tolerance when things are going great, but when things turn around, the pain becomes more intense.
When thinking about the future, we tend to think in isolation.
We image the future in a vacuum, failure to contextualise all the reasons why this future as occurred.
Future fortunes are always imagined in a vacuum, but reality is lived with the good and the bad taken together.
Rule 25: The best way to teach your kids about money is to make them feel the power of its scarcity
Making sure your kids understand the power of scarcity with money teaches them the difference between necessary and enjoyable.
It makes them learn to enjoy what they have, and fix what’s broken.
Rule 27: Embrace and accept your flaws, and build a financial plan around them
Do this rather than assuming that you can alter your susceptibility to dopamine and cortisol just by reading a blog posts.
So many people think they can look at their past financial mistake and that the lesson is learned.
Most of the time, the way you responded to a past crisis is likely how you will respond to the next one.
The best thing you can do is build a plan around that, rather than trust yourself.
Rule 28: Emotions can override any level of intelligence
A genius who loses control of their emotions is a disaster
The opposite is true
Ordinary folks with no financial education can be wealthy if they have a handful of behaviour skills that have nothing to do with formal measures of intelligence
Rule 29: Comedians are the only good thought leaders
They understand how the world works, and they only wish to make you laugh, rather than making themselves sound smart.
This has got nothing to do with money, but I put there for laws of communication in general.
Rule 30: The luckier you are, the nicer you should be
Some say the opposite; the nicer you are, the luckier you become.
To me, this is there to protect against entitlement is to be nicer to the people around you.
Here is the link to the podcast:
Rules of the Money Game - The Morgan Housel Podcast (link here)
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