Personal Finance - What You've Ignored

This is the transcript of my video posted on Youtube and Bilibili. If you like it, go check out my videos there!

Hey y’all what’s up? Today we’re gonna do a book review video of what I read over the last weekend, which is called The Psychology of Money>*. I have a lot reasons to recommend this book to you.

First and foremost, it’s just great content and very inspiring. We’re gonna talk about whys later in this video. Another reason, I made a video about learning English and some of you have been asking me to recommend some books to read. And I think this one, in particular, is very well structured, split into 20 short lessons that are full of interesting stories and history of America, so you can pick it up anytime you want without losing the context, and overall it’s just very easy and entertaining to read.

In this video I wanted to share 5 most important lessons learned from reading this book. These lessons either really reinforced my beliefs and goals in terms of personal finance, or made me realize that I could’ve thought and done it differently, or even, I’ve been just doing it wrong.

I gotta admit, we all think we know how the world works, but we’ve all only experienced just a tiny sliver of it. So don’t be too judge mental about what others are doing with their money, because we all think of it differently, and we’re all playing a different game.

Lesson number 2 is about the ultimate purpose that money can be used for. And I’ve become more and more in belief that the answer is “FREEDOM”, that you have total control of your time, to be able to say “I can do whatever I want today” when you wake up.

And that’s probably the greatest intrinsic value of money. With just a small amount of money in your bank, you’ll be able to take a couple of sick days off. With a bit more, like a six-month emergency fund, you won’t be too terrified by your boss, because you know your life won’t be screwed up if you have to take some time off to find a new job. And this is life-changing, because as much as people say money isn’t directly related to happiness, it gives you a prospect that how it can be leveraged to achieve happiness. The greatest things in life, like quality friendships, being part of something bigger than ourselves, spending quality, unstructured time with our loved ones, these are really hard to achieve if you are financially poor.

Lesson number 3 is about saving money. The two things in recent years that I’ve realized, are one, building wealth has little to do with your income level or investment returns, but it does a lot with your savings rate and what kind of lifestyle you want to maintain.

And that lifestyle, from what this book is called, is determined by your ego, by your desire, by how much you care about others think of you, or you think how others think of you.

The great thing about saving money, is that this is something that you have 100% control over, compared to how the stock market goes, even how your income grows.

Lesson number 4 is that the tail events are everywhere. Tail events are low-probability events arising at the right end of a normal distribution curve. To give you an example, Walt Disney didn’t become successful until the Snow White and the Seven Dwarfs premiered in 1937. They produced more than 400 cartoons before but most of them lost a fortune. The reason a lot of companies or people are successful nowadays, is because they’ve failed many more times already. In 2018, 1 out of 500 companies in S&P 500, drove more than 6% of the total returns. And that company was Amazon. Ana Amazon’s growth is almost entirely due to Prime and Amazon Web Service, which itself are tail events in a company that has experimented with hundreds of products including Fire Phone, which you probably never heard about.

But you see, most of our attention goes to things that are huge, profitable, famous, or influential. When you only pay attention to a role model’s successes, we overlook that their gains came from a small percent of their actions. That makes our own failures, losses, and setbacks feel like we’re doing something wrong. But you need to realize that’s the tail events. They could be as wrong as you, but in the context of investing, George Soros said, “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong;”

Lesson number 5 is that reasonable > rational. A lot of times we spend too much on numbers, and focusing too much on outcome, without considering our feelings. To give you an example, the author of the book paid for their home with all cash, without mortgage. Just looking at it from a financial perspective, this seems like a no-brainer stupid decision. We all know that a low-interest mortgage rate, plus considering the inflation, you can leverage the same money to put into other investments and have a much better off return over the long run. But to them, the psychology effect of being independent and not owing the bank, far exceeds the known financial gain with the mortgage.

Of course, I’m defending this action myself. But you see, our goal isn’t to be coldly rational; but psychologically reasonable. When I started out learning investing and personal finance, a story that I heard that people talked about a lot, is that you should stop buying coffee. Because with that 5 dollar Starbucks latte , you’re essentially giving almost a hundred dollars 30 years out, if that same 5 dollars could be put into stock market with an average 10 percent annual return. That’s being rational, but realistically, I would never be able to 100% cut off from purchasing, because of the pleasure and the mentioned psychology effect of having a tasteful coffee at the moment.

Alright, that’s all the content for this video. I hope you enjoyed it and I highly recommend reading it yourself. If you like this sort of book review, make sure to subscribe to this channel and hit the like button for the Bilibili algorithm. :)

Comment below and let me know what books you have been reading. Until next time, see you!