The psychology of money book full summary with examples from my own life

 The psychology of money book full summary with examples from my own life 

The key learning that I had from this book right, here it's called the psychology of money is a very interesting book, and a lot to learn but instead of focusing on the book I will focus on the key learning that I had from this book, that I applied in my own real life and I benefited from it so that will be off, more meaning to you rather than just talking about this book the book starts, with a very interesting story of a person named ronald james reed who came from a very poor background so he was a car mechanic for about 25 years and then for the next 17 years he used to wipe the floors of showrooms right so came from a very very poor background but at the age of 92 when he died, he made the headlines because at the time of his death he had 8 million dollars in his bank account and most of that money he donated to charity now how does a person like him become a millionaire? right, that's the question that a lot of people started asking well it turns out that the secret of him being a millionaire was not that big of a secret right so what he did was throughout his life whatever minimum saving that he had he used to buy stocks of blue-chip companies that's all he was doing just keep buying stocks of the blue-chip companies and he never sold whatever recession whatever stock market crisis happened he never sold even a single share and the stock market did the rest,

now in contrast to this story is a story of richard fuscon now rich was a very smart guy right and he went to harvard and then he joined a company called merrill lynch which is one of the biggest investment management companies in the whole world and not only he joined that company he also rose to a very senior rank in this company so he was very successful he was very smart but he also had some very expensive taste so for example he bought a house which was about 18 000 square foot where he had 11 bedrooms he had two swimming pools he had two garages right he had so many of these luxurious things in that house that for maintaining that house itself per month he used to spend about 50 lakh rupees now everything was going fine in richard's life until the 2008 financial crisis came along now it hit him harder specifically because first of all he lost his job and secondly he was not able to maintain the property which he had because he had to pay this huge money every month so he had to sell his property first of all and then he had to declare bankruptcy just to come out of this whole situation now we have all heard about stories like this before right and the moral of these stories is always the same that you have to live within your means you have to,keep saving you have to keep investing for the long run and you know that's kind of the obvious thing to have but what is more important what is i think underappreciated is to understand our relationship with ,money right how do we behave with money ,when we have it and how do we behave with money when we don't have it and that is exactly why we need to understand the psychology of money because on the one hand we have opportunities like ronald read where we can create some immense wealth in our life and on the other hand we have the possibility just like with Richard fuscon where we can make some very expensive mistakes in our life and we can lose whatever we have so that is exactly what this book is all about to understand the psychology of money and here are the key takeaways from this book take away number one our childhood experiences shape our world view so whatever experiences that we had when we ,were kid right that experience that we had that understanding that we had by looking at our parents by looking at our relatives that may account for let's say 0.00001 percentage of how the world really works but that view that understanding that we develop by watching our elders is how we believe 80 percent of the time the world works so in other words whatever we see whatever we experience when we were a kid that shapes our world view and that's how we think the world really works now some of us came from 

families that were very conservative they just used to you know create fixed deposits and just keep money with themselves no investing whatsoever some came from families that were very active in let's say investing in properties some come from family which were very active in you know buying gold right and even though after we grow up and we have a better understanding of how the world works we are still deeply impacted by what we saw our parents do at the time when we were kids for example in my case i come from a humble background and growing up my family was not very savvy in terms of investments my you know we didn't have a lot of savings we didn't have a lot of money but we did have some gold right and my mom kept that goal for a very long period of time and and then a time came where we had to deal with some financial crisis and by selling that gold we were able to navigate through that tough time and we were able to move on and of course things became better over time
and because of that experience even till date i have a soft corner towards gold in my mind even till date right even till date i like to buy gold i don't like to sell it even till date i believe this is a safe investment and irrespective of whatever evidence somebody presents to myself i will still have that favorable opinion of gold because that is how my childhood experience is so this affiliation that i have towards gold is it rooted in the realities of today or is it rooted in the childhood experiences that i have had and that is a very important question to answer.

because is gold even till date a safe haven is it a good match for my long-term goals because that's the question that i have to answer today not based on the facts of yesterday but the facts of today now in the same way a lot of us grew in families that were afraid of investing in the stock market right so i remember a friend of mine he his father he used to say in hindi all the time that the stock market says means it's a gambling it's all gambling and he was actually right at that time because the stock market culture is relatively new in india and at that time the equity culture was not there the regulatory framework was not there right so there were a lot of fraud there were a lot of issues there was a lot of manipulation that was happening so he was right at that time but does it mean that 20 years down the line 30 years on the line 40 years down the line we still carry the same perception about the stock market and should i carry and should i give the same perception to my kids that when they are in their 20s and 30s and 40s they carry the same perception that stock market is all a gamble right.

so we have to at some point stop and ask that whatever perception that we are carrying from our parents and our relatives is it still valid or not now let's talk about the take away number two that is the power of compounding now i will start with a little puzzle for you imagine there is a lake and in that lake there is a small patch of algae so algae for those of you don't know that's like the green plant kind of thing that floats on the surface of these ponds and lakes right so this algae grows in size every day and it becomes double every day so from day one till day 50 on the day 50 the whole lake is covered with algae right so the question to you is that if on the 50th day algae covered the whole surface of the lake when do you think the lake was covered half by this algae now instinctively most of us will think that okay if the algae took 50 days to cover the whole lake most likely took let's say 25 days for it to cover half of the lake but the answer to this question is always surprising is that it is the 49th day when the algae was covering half of the lake right and on the 50th day it doubled in size and it covered the whole lake and that is exactly how compounding works right we don't even know that it is growing it is working in our favor and up until that 49th day up until a threshold is crossed we will not realize how powerful compounding is but when we cross the threshold then we see the real magic of compounding

 now let me explain this from a real-life example of two world-class investors warren buffett and jim simons now i'm sure a lot of you already know about warren buffett jim simons not so much but i will talk about him in a bit both these investors are in their 80s and both these investors have become billionaires by investing in the stock market as of today warren buffett has a wealth of over 100 billion dollars and jim simons has a wealth of about 23 billion dollars but here is the thing warren buffett's return from the stock market is about 22 percent on an annualized basis whereas jim's returns from the stock market in the same period are about 66 so clearly the puzzle here is that if jim's is making three times as much as warren buffett then why is his wealth not even the one third of the wealth of so the answer to this question lies in time right warren buffett has been investing ever since he was a kid right so for about 70 years warren buffett has been investing and this annualized returns of about 22 percent that he has generated has compounded on an annual basis and has created this massive wealth that we see today .jim simons on the other hand did not find his investing strategy up until he was 50 years old right so of course he has made substantial money since he discovered his strategy and then he started this hedge fund called renaissance technologies but still the time is not on his side so just like the kind of effect that we saw in the lake on the 49th day right when that algae covered the full lake on the 50th day that is exactly the power of compounding that warren buffett is experiencing right now and even though jim simons of course doesn't have the time on his side but if you just imagine and just imagine for a second that if jim simons were investing for the same period at the same rate as warren buffett did you know how much wealth he would have jim simon's wealth would have been and

last 70 years would have been more than the gdp of the whole world the whole world put together right so right now of course i hope at some point he gets there but the point that i'm trying to make here is that the power of compounding comes with time and what it means for us the retail investors is that the longer we are invested in the market the wealthier we get because the power of compounding starts working in our favour now the takeaway number three is that do not move your goal post now uh this is interesting because we all like to you know grow in life we like to set targets and then once we meet those targets we like to you know set more ambitious targets so that we can go more in life so at the beginning you know when we are in our 20s we just want to you know buy a house uh we need to have let's say you know one crore rupees in our bank account and that is that is you know the target that we all want to you know achieve at some point and once we achieve the target now we set up some new targets more ambitious target now we want a bigger house now we want a bigger car right and now we want to go out for a vacation right whatever is our new target and that's a good thing that's really a good thing because that ambition keeps us pushing to you know do more and more so that you know we achieve more in our life but when it comes to the long-term goals we also have to be honest with ourselves right this pushing of the goal post is very good when we are in the you know initial stages of our life but when we are in our 60s or when we are in our 70s we cannot keep pushing this goal post too far we cannot say that okay you know we had this goal up till this time but i'm not happy with it now i want to have something more and this is one of the problems that we are facing in our society that in spite of generating so much of wealth in spite of generating so much of money still, people are unhappy

 why because we are living in the world of you know social media of instagram or facebook or twitter where we see our friends you know their friends or some celebrity posting photos of some you know great vacation that they had of the expensive car that they bought and now whatever that we have done with our own life whatever goals that we have achieved they all look minuscule they all look very ordinary they all look very boring as compared to that right and now all of a sudden now you were happy until you saw those pictures but all of a sudden now you are unhappy because if you always keep comparing yourself with others you will always feel insecure you will always feel unhappy

you will always feel that you have achieved in your life right so stop comparing yourself with others have some long term goals stick with them and if you can achieve them you have done enough just be happy just be content that you got there take away number three you only need a few big wins now one of the biggest misconceptions that a lot of people have is that youhave to be right a lot of time to be able to make money from the stock market whereas the reality is that you only need a few big wins to win at this game now take for example venture capitalist right a venture capitalist from for example when they are investing they are not investing in one company they are investing in hundreds of companies and they know that half of the companies that they are investing are not going to be profitable they know it from the get go that half of them will not make any money so they are aware of that and they know that maybe another 20 30 percent,

probably will break even they will just give maybe a little bit of a return so that venture capitalist firm just needs one zomato one paytm or one by you to not only recover the losses that they had from other companies but also to become immensely successful that is exactly the same kind of mindset that you have to bring in investing as well right most of the time in the stock market you will be an average investor and there is nothing wrong with it but there will be very short period of time during which you have to make some decisions and how you behave on those specific months those specific weeks those specific days will decide whether you become immensely wealthy or you stay as an average investor

napoleon bonaparte had uh in a very interesting saying that a good leader a great leader is someone who behaves normally when everybody around him is going crazy in the same way an intelligent investor is one who can behave normally rationally when everybody around him or her is behaving irrationally is going crazy so what did you do when the stock market crashed in 2001 what did you do back in 2008 when the market gave an amazing opportunity what did you do last year in 2020 when the market gave such an amazing opportunity when amazing companies big companies were selling at rock bottom prices were you scared or did you see that opportunity of investing these companies at such an amazing price so if you can focus on these opportunities when everybody else around is going crazy if you can just be rational you can be immensely successful now the next takeaway is a very philosophical question and that is what is the purpose of money why do we need money now i'm sure most of us we don't really pause and think about it but it's a very important question so just think about it right so back in my 20s when i was earning and i wanted to go out and i worked in japan i worked in u.s my goals of earning money

was to have a better house to give all the comforts to my family and then when i was then you know when i was in 30s my goals were to become financially independent to secure the future of my kids but now when i think about money the purpose of having money the purpose of making money for me is much more fundamental the purpose of making money today for me is to gain freedom and freedom of what freedom over my time so freedom of doing what i want to do freedom of let's say spending time with my kids freedom to pursue my own passions without having to worry about what my boss is thinking or what somebody else is thinking i can do what i want to do because i am financially

free so the highest form of wealth is waking up every morning and saying to yourself that today i can do whatever i want not what my boss wants not what somebody else wants what i want what is that i want to do today that's what money is for to gain freedom over our own time so the next takeaway of this book is wealth is what you don't use so in this culture that we live in we see a lot of people you know who are showing off they have you know ferrari they have maserati they are making a lot of money they are showing off and that's what we believe they are like you know rich people but at the same time there are a lot of other people who can afford to buy a ferrari to buy a maserati or a bmw but they choose to live simpler lives right so the people who are driving these big cars the people who are living this lavish lifestyles we can call them rich and the people who have the 

capability of doing all this but they choose not to do it we can call them wealthy so richness is visible wealth is not and you need to make a decision that what is that you want to become do you want to become rich or do you want to become wealthy there is first of all there is nothing wrong with being rich or there is nothing wrong with being wealthy but if you want to be rich there are a couple of things that you have to keep in mind number one if you want to sustain because you have to keep spending money to stay rich that that's how you know rich people are you need to keep earning at a much faster rate because your levels your standard of living will keep going higher right so it's much harder to stay rich as we saw in the case of richard it's much much harder to stay rich than it is to stay wealthy right that's number one so you have to make that call the second thing that you have to realize is that it's very easy to have role models that are rich right so people around us people on social media people on you 

know tvs and celebrities it's very easy to see the kind of lifestyle that they're leading but wealthy people who have the money who have the capability but they choose not to live that kind of a lifestyle those kind of role models are very hard to find because of the very nature that they live simple lives right we don't necessarily know that they have that kind of money right so it's hard to find role models that are wealthy but if you can find role models that are wealthy you need to learn from them just as much you need to learn from people who are rich because both of them are successful it is just that one decided to show off and the other decided to keep the money for what for having control over their life for having the control over their time for having the control to do whatever they want to do in life now the next takeaway is that being reasonable is better than being rational now all throughout our life we have been told that when it comes to the matter of money when it comes to investing when it comes to trading 

whatever is the case whenever money is involved you have to be cold and you have to be rational you have to look at the facts you have to make your decisions based on that and i agree for the most part it is true but we also have to realize that we are human beings right we are not robots we are not spreadsheets so when we see this it's more like a spectrum and on one end of the spectrum we have this cold hard rational thinking and on the other end of the spectrum we have this emotional feeling based decision making and we need to avoid both end of these spectrums we need to find a middle ground where we can have decisions based on the facts but at the same time we need to be able to live with those decisions and this middle point is called being reasonable so i'll give you guys an example of this so for my daughter's college education i have a couple of portfolios and in those portfolios i have some metal stocks right and these metal stocks they did extremely well some of them i was making 100 200 300 even more than that and i actually made a video about this and at one point i had to make a decision that do i want to stay in this portfolio keep writing this wave or should i book my profits right so i decided to book the profits in my portfolio and i decided to come out now was i being rational was i being completely cold calculated rational person probably not right because there was no specific reason for me to exit right uh the stocks were doing perfectly fine there was no necessarily reason for me to come out of this portfolio but was i being completely emotional probably not right because i was sitting on a lot of profit and it is for my daughter's college education so it was very reasonable for me to secure whatever gains the market gave me so this is the kind of thinking that i like to think that okay 

being rational is good but being reasonable is better because i can live with the decision right i can explain my daughter 20 years on the line that why did i come out of this portfolio because it made perfect sense from a reasonable perspective now the problem that i see with a lot of people is that they come up with this you know back-tested strategies with two or three growth stocks and that one the hindsight and they say that okay if you invested in these three stocks and you stayed in these stocks for let's say 20 years or 30 years you probably would have you know generated like you know 10 times or 20 times returns and the example that i give them is that that they give me right it's one of the favorite examples of that these people give me is that of titan that look titan was a penny stock and you let's say you bought titan at five rupees right now i said like thousand rupees right so that's how people think and i pose a very important question to them that two times in the life of titan titan fell down more than 60 percent within one month right back in 2008 and recently in 2020 60 so let's say you had one crore rupees in titan and you lost 60 lakh rupees of course national loss not a real loss but would you be able to go back to your home and tell your wife that yes we had one rupees up until last month but because of this correction we lost 60 lakh rupees but don't worry all my back tested result tells me that we will eventually make more money it's okay don't worry about it do you think it is reasonable to assume that 

your family will understand this right so this is the difference guys making a decision based on rational facts is one thing but being able to live with those decisions is completely another and for any reasonable person to assume that your family can live with a loss of 60 percent this is why people incur losses right because they cannot handle the things that they think that they can do but their mind is not ready for that right so make decisions that are more reasonable than rational because you can live with them you can manage them have the right kind of diversification even if it means that your returns are lower you can at least sleep well at night without having to worry what will happen the next day so guys these were the key takeaways from this book and i hope that you guys learned something there is another book on jim simons that i want to make a video about where we can talk about his journey of how he became you know a billionaire from the stock market what kind of strategies he used and i hope that you guys are learning from this kind of videos and this is the first in the series where we are discussing a book let us know in the comments below if you like you know this video and you would like to us to make videos about jim simons and keep going in this series i like it because i personally you know love reading books and i like to share knowledge so let us know and we will keep doing more of this

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