BEING LESS STUPID #15 - Six Money Lessons
The Psychology of Money | Charlie Munger’s 'Bag of Tricks' | What I’m Teaching my Son about Money | Why You Shouldn't Max Out Your 401(k)
👋 Hello
Since childhood, I was fond of doing business. During my teenage, I used to dream of running my own business when I grow up. That is exactly what I did in my late twenties. I tried my luck with multiple businesses. I owned a men’s grooming salon, a few ice cream parlors, and a meat shop. None of these businesses succeeded. I had to shut them all at one point. I lost most of my saving in these ventures. Ten years later, here I am a little wiser with my money in my late thirties. Below are 6 lessons about money from my experience.
Save for an emergency
You should have an emergency fund to cover at least six months of your expenses. I was lucky to have a stable job during my trying times with my business. I would have gone bankrupt if I had lost my job when my businesses were suffering. Always keep an emergency fund.
Knowing when to quit
Being honest about performance is one way to avoid the sunk cost. If you know the business is not doing well, don’t be afraid to quit. Sometimes it is better to quit and start again than to hang on to a thin thread.
You cannot go bankrupt if you don’t own debt
The only good thing I did in my twenties was, I did not borrow. You will not go bankrupt if you don’t owe any debt. Avoid debt to live another day.
Diversify a little
I drained most of my saving into these businesses. But I had invested about 10% of savings in publicly traded companies. But most of my public market money was concentrated into a single stock XPEL. That was a bad beginner move to invest all my money into a single stock. But it turned out to be a great investment for me. It could have gone belly up. Never invest all your savings into a single stock or a single asset class for that matter. Diversify a little, but not too much.
Acknowledge the luck
I got lucky. I got very lucky with this investment. I got lucky not to sell early. I was lucky to have invested in this stock in the first place. I got lucky with the position size. Whether you acknowledge it or not, Luck plays a big role in investing.
Do not disrupt compounding
I had multiple opportunities to exit this stock for a 100% to 300% gain. But I held on. Now it is a 15 bagger from the lowest price and a 10 bagger from my average price. Do not disrupt compounding.
📚 Book Notes - The Psychology of Money by Morgan Housel
Doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people. A genius who loses control of his/her emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.
Our findings suggest that individual investors’ willingness to bear risk depends on personal history. Not intelligence, or education, or sophistication. Just the dumb luck of when and where you were born.
Luck and risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort.
Getting money is one thing. Keeping it is another. If I had to summarize money success in a single word it would be “survival.” Nassim Taleb put it this way: “Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.”
Anything that is huge, profitable, famous, or influential is the result of a tail event—an outlying one-in-thousands or millions event. And most of our attention goes to things that are huge, profitable, famous, or influential. When most of what we pay attention to is the result of a tail, it’s easy to underestimate how rare and powerful they are.
Over the course of your lifetime as an investor the decisions that you make today or tomorrow or next week will not matter nearly as much as what you do during the small number of days likely 1% of the time or less when everyone else around you is going crazy.
The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.” The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.
🔍 Interesting Reads
1. Charlie Munger’s ‘Bag of Tricks'
On Learning - “Something that's more important than what they teach you in college - learn the method of learning.”
On Resentment and Hatred - “There are two things I have noticed in a long life, that really do enormous damage to the bearer. One of them is resentment, and the other is hatred. What good is it going to do you to have this vast resentment of the way the world is?”
Equities - “I am continuously invested in American equities. But I've had my Berkshire stock decline by 50% three times. It doesn't bother me that much. That's just a natural consequence of an adult life, properly lived. If you have my attitude, it doesn't really matter. I always liked Kipling's expression in that poem called “If”. He said, success and failure, treat those two imposters just the same. Just roll with it.”
Best loved ideas - “One of the great tricks in life is to destroy your own best loved ideas. That I worked at. I actually go through my best loved ideas occasionally, see if I can weed one out.”
Ask questions - “One thing I’ve learned is to always inquire. Always ask questions, and look at the vulnerabilities of a situation in order to figure out how to solve it.”
2. What I’m Teaching my Son about Money
Money is something you can master and control, rather than letting it control you.
Income is not something that employers or the government ration out to you based on a rigged system. It is something you generate yourself. It is the byproduct of your hard work, combined with learning and mastering the system itself.
“Expenses”, “Needs”, and “Cost of Living” are terms that come from a mindset of weakness. Instead, use the words, “My Spending”, and realize it is in your control.
Even if you don’t exercise every last option in life, knowing that you have complete power over your spending is a key ally for financial freedom.
Life is not a competition. It’s a gigantic collaboration, and the world welcomes and rewards people who see it that way.
It is much more efficient to rise up to into your own niche without the constant drag of material addiction telling you you aren’t good enough. Paradoxically, this path is rare enough that you might end up earning even more money in the end.
And finally, money is not the end of the quest of having a good life. While it is currently a major barrier to most people, it is easy to master it early in your life. Then you move on to the real challenges: finding out what life is really about. Hard work, being good to others, a good amount of proper difficulty, and learning as much as you can pack in during your time alive.
3. Why You Shouldn't Max Out Your 401(k)
You should always contribute to your 401(k) up to the point where you get the entire match from your employer. This is free money and not something that I consider up for debate.
That illiquidity premium is just too small to be worth it even if you don’t need the money for something like a down payment on a house. And for those with a traditional 401(k), the benefits are likely to be even smaller given the current trend of U.S. deficit spending and likely future tax increases.
However, I do see why maxing out a 401(k) could make sense for behavioral reasons. The analysis above assumes that you can buy and hold assets in your taxable account for decades without touching the money. That’s easy in theory, but difficult in practice.
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