We explore some of the key points, like the role that luck plays in success, why poor people buy lottery tickets, and the differences between getting wealthy and staying wealthy.
Here are some of the highlights from our discussion:
Doing well with money has little to do with how smart you are and more to do with your behaviour around money. Money is a lot more about behaviour and a lot less about knowledge and understanding of numbers.
Financial success is not a hard science. To a certain extent financial outcomes, both successful and unsuccessful, are driven by luck and behavioural characteristics, independent of intelligence and the skill of the investor.
No-one is crazy, every decision that someone makes about money makes perfect sense to them. For many people, their attitude towards money is built from wanting to avoid the situation of not having any money – it might not be rational but it’s not wrong.
People can be broadly divided into two groups – the rational investor and the reasonable investor. There is the rational investor, doing the calculations and treating money as something that doesn’t have emotional value, and the reasonable investor, who recognises the emotional baggage that money has associated with it. For example, when it comes to renting or buying – for the rational investor it makes more sense to rent and put the money that you would’ve used into the stock market. However, intuitively we are led to believe that renting is throwing money down the drain and the cultural significance of home ownership in the Western world is so significant that many people choose the property route which also appears to provide a degree of safety for their money.
Luck plays a disproportionate role in monetary success but people often avoid acknowledging it. Whilst no-one doesn’t think that luck plays a role in financial success, since it’s so hard to quantify and rude to suggest that people’s success is a result of luck, the default stance is to implicitly ignore luck as a factor of success.
It’s non-sensical to risk what you have and need for what you don’t have and don’t need. Reputation, happiness, freedom, family and friends are the most valuable assets we hold – we need to recognise our point of ‘enough’ when we are at risk of risking these important things for more money and more status.
You don’t need tremendous skill or luck for tremendous results, you just need compounding and time. Warren Buffet’s $84 billion wealth is a result of nearly 75 years of strategic investing but, equally importantly, due to the powerful effect of compounding. When it comes to the decisions of the rational investor, they will try to maximise their own personal chances of staying in the game for the longest time.
Getting money and keeping money are two entirely different skills. To get money involves luck, skill and putting yourself out there and taking risks. To keep money requires frugality, recognition the role that luck played in your accumulation of wealth, recognition that it might not continue forever and recognition around what is enough.
Planning is important but the most important part of every plan is planning for when the plan doesn’t go according to plan.
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