The Psychology of Wealth

Some people think that having a lot of money in savings doesn't mean you're smart. Ronald Read the janitor that had 8 million dollars did the same thing most of us do - he saved his money consistently throughout his life. That's what made him so successful - compounding. Even if you're not as intelligent as Ronald, your behavior with money is still important. In fact, if you're not a Harvard graduate or working in Wall Street, there are ways to become rich by behaving properly according to Morgan Housel, it's like this: Financial success doesn't have to be a complicated science. It is a soft skill, where the way you behave is more important than what you know.

Spend your next ten to fifteen minutes on this article, and you might excel on the soft skill of investing! With the five most important takeaways. And with all the good advice and tools on how to achieve financial freedom through stock market investing.

Takeaway 1: Pay the price Let's say that you'd like a new, nice watch. You'll go to the shop and look at what they have. You're really looking for something that can impress your girlfriends and the beautiful woman you've been seeing. Now you have a choice: either pay for the watch or steal it and run; because you have done your cardio, right? I think the first option would be selected by you. - no matter your physical capacity. If you took your card and tapped it, you'd do the right thing. I mean, you're aware that a new watch is costly and must be paid for.

It is the same with investments, and it comes at a price. A few recurring observations in the case of high returns; one of them being a somewhat concentrated portfolio.

with Peter Lynch perhaps being the exception. The concentration of the portfolio will give you a characteristic in your performance.

That's going to be a volatile thing. The price is the fee for having high returns on the stock market over a long period of time. If your stomach isn't up to the task when, say, 20 % of your wealth disappears in one week, as your two largest holdings report a lower-than-expected profit for the quarter, don't aim for a high return rate.

Because this fee tends to be higher when the return is high. Suppose you were able to think of a promising future for Netflix 10 years ago. In the stock, you have invested a substantial proportion of your wealth. So today you're going to be a very wealthy man! But for a journey like this, would you be willing to pay the price?

There were a lot of major declines in Netflix over the course of this period. If Netflix were to lose thousands of customers during 2011, you'd still be sitting on that boat, and during the subsequent months, shares fell by 80% from their peak? The returns on your portfolio would not look good. What'd you like to say to your husband and children? Would you hate to face them and know that, by doing so, you might have jeopardised their future?

Do you still consider it a good idea to spend almost all of your time on Netflix? Of course, it's an extreme example, but you will also have to pay a price of volatility if something less extreme than the full Netflix approach for investing is in place. In 1980, you purchased an index fund for the S&P 500. If your investment portfolio were down 20 % from its high, you'd need to face a combined 13 years. And when it was down 50%, about eight months. That’s tough!

Investing on the stock market is an excellent thing, allowing for wealth creation like few other options. Don't be trying to fool yourself, you won't get it for free. volatility is going to affect all investors. And it's the price you have to pay for a brighter future. Takeaway 2, Never Enough: It is a very interesting phenomenon. You could give someone a $2 million bonus, and they will be okay until you find out the person next to them got 2-million-1, and then they’re sick for the next year. Capitalism does two things very well: I'm generating wealth and envy. The desire to be ahead of your neighbors, your friends, and your colleagues can help to fuel your hard work and make you strive to be the best you can be. And of course, the motivation to step up our productivity and do more meaningful work. It's a good thing, but social comparisons can make us feel like we're never enough. Let's have a look at some statistics.

You would have to make somewhere between $500,000 and $500,000 a year, if you wanted to become one of the richest 1% in America. That's what a specialist doctor who, let's call him Bill, gets paid and is considered rich by almost any standard. He'd have the luxury of driving nice cars and going on long holidays to exotic countries, or hiring someone who works things he thinks are tedious. Bill has been feeling about himself and how he'd achieved financial success in his life Well, that was until he bought a vacation home in the Hamptons and realized that he had Stan as his neighbour. Stan belongs to the top 1% of the 1%. He's the chief executive officer of a very large public company, and he's making a staggering $10 million a year. Now, you’d hope that at least Stan would be satisfied with his financial achievements, but nope! This guy's a friend of Michael Jordan's when he was growing up, and this all-time great basketball player is someone who belongs to the 1% of the 1% of the 1%. Well, it's about two billion dollars compared to Michael's fortune. Stan’s yearly salary of $10m suddenly seems like peanuts. Isn't this the end of it? No, that doesn't work because Michael occasionally attends parties with celebrities where a guy named Jeff Bezos shows up.

Bezos is in the top 1% of the 1% of the 1% of the 1% So in 2020, he increased his worth by about $75 billion, and now it's close to $200 billion. There are always a lot of bigger fish. This type of envy created by these comparisons had caused many people to make foolish mistakes in the course of history. Some have leveraged their portfolios to the teeth in order to move up to a higher pyramid, just to lose it all and then commit suicide.

Some of them acted on an insider's report, then later lost both personal reputation and liberty when they were arrested. Many have forsaken their families and then had their partners leaving them or cheating on them (or both) as a result. If you watch this channel, learn how to be a successful investor; The chances are you'll be able to attain a level of financial freedom that only the average Joe can dream about one day. But at some point you must admit that there is simply no more. We're not going to let anything we have or need be traded for something that doesn't exist and needs nothing, I mean, even if we wanted to have it.

Takeaway number 3: Crazy is in the eye of the beholder.

On the surface, it appears that many people do insane things with their money. It's being spent in absurd amounts on stupid things, and a lot of people hide it under the mattress. But it's important to remember that people are from many backgrounds and have various childhoods, Different parents, different life experiences, varying degrees of education. In all this, they add up to different opinions and values.

It is possible that what appears irrational to you may be perfectly logical to me. For instance, the lowest income households in the United States spend over $400 annually on lottery tickets, which is four times more than the average expenditure of the highest income group. This is compounded by the fact that more than a third of Americans are unable to come up with $400 for an emergency. It may seem absurd that these individuals would spend their emergency funds on lottery tickets, but we must consider their perspective. They live paycheck to paycheck, have limited opportunities to save money, and often lack education and career prospects. They cannot afford luxuries such as vacations, new cars, or college education for their children without incurring significant debt. Purchasing lottery tickets is their way of buying into the dream that many of us already live.

Understanding these differences can help us make better investment decisions. By acknowledging that we have different goals and risk profiles, we become less inclined to copy investment portfolios or strategies that do not align with our objectives. For example, our risk tolerance may be higher than that of a billionaire, as our focus may be more on the "getting rich" aspect rather than "staying rich." Copying a billionaire's portfolio may not be optimal for our goals.

Recognizing differences can also help us say no more easily to investments that are outside our circle of competence. For instance, Gamestop was not an investment opportunity for me as I am not a trader.

It is more useful to prepare ourselves mentally and financially for unforeseeable disasters than to hope that we can react before everyone else. Macro projections should not be relied upon as the things that will cause significant fear among the investment community in the future are unlikely to be foreseen.

Pessimism is seductive, and we tend to listen to pessimists more carefully than optimists. This is an evolutionary trait as organisms that treat threats as more urgent than opportunities have a better chance of survival and reproduction. Progress happens much slower than setbacks, and tragedies and setbacks happen during much shorter time periods, making it easier to create an intriguing and persuasive story around them. To create an optimistic story about the future, we must look at longer time horizons, which often becomes more vague and less dramatic.

Envy is the worst of the seven deadly sins, and we should never risk what we have and need for what we do not have and do not need. Different perspectives cause different courses of actions to be reasonable or rational.

In conclusion, understanding human psychology and its relation to money can help us make better investment decisions.