Finance on Basil Labib

Thoughts: The Psychology of Money (Book)

gs454236@gmail.com (Basil Labib) — Mon, 15 Nov 2021 08:58:30 +0530

Abstract

Morgan Housel’s “The Psychology of Money” is less of a technical book and more of a collection of wisdom and wishful advices. It is N. Taleb’s “Bed of Procrustes” augmented with real life anecdotes, morsels of history, and a lot of quotations. Although Housel professes a very conservative and frugal approach to managing money, his advice cannot be disputed without a very good counter argument. The cautious models, frameworks, and signposts laid out in the book would prevent an investor from being foolish and that Housel says is too easy to be in the modern financial system.

“A genius is the man who can do the average thing when everyone else around him is losing his mind.”

— Napoleon

The psychology of money

This book is unique with respect to contemporary finance books because it assumes a psychological approach to finance, rather than a quantitative analytical one. The reason being this: Humans are inherently emotional and irrational creatures. Most of our decisions are instinctive and impulsive. Then how can we assume an individual to behave like a well-tuned machine making decisions based on “rational” and precise mathematical formulae? For example: If you were an investor in 2008, it would have been very difficult to hold on to your assets when everybody was selling, or moreover, to dare to buy in the market crash because as Warren Buffett quipped, “Everything got cheaper”. Unless you have the discipline and patience of Warren Buffett, such decisions are hard to even comprehend. And that is essentially what this book is about. It talks about few fundamental basic, even mundane nature of human and how we tend to act upon them, how it all applies to finance and how we can leverage this knowledge to become more disciplined and patient.

“To grasp why people bury themselves in debt you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism…”

— Introduction, The Psychology of Money

The idea that gives rise to such reasoning is quite potent and an ironically overlooked one in the money business.

My favourite Housel quote would be the following:

“Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.”

— Morgan Housel

Most people don’t realise it but this is a very powerful idea. It can explain why we don’t usually get the result we think we ought to get. It can point to how we ought to react and improvise under dire as well as lucrative circumstances. Not just in finance but in other aspects of life too. Cultures and systems have grown to be complex and varied. Wisdom has become more diverse and specialized which is exactly what wisdom is not.

I strongly hold the belief that all complex systems and the world in general, is simple. To clarify, this “simple” does not mean “simple to understand”, it means “simple to navigate and emerge successful however one chooses to define the word for themselves”. Because ultimately, all effort of man and woman is to find utility in life.

Things that worked for me:

It’s not a long book which is a boon for me really. It makes its points concise and clear and that’s good.
In the edition which I have, there is a postscript section which chronicles the economic history of the US from 1945 to the present day and that is very cool. In fact, I was looking for something exactly the same but for India. I want to understand how we got were we are.
Entire book summary tacked at the end. It’s a conglomeration of the most important ideas all in one place, kind of like what I do here with my notes. Now, I can refer to that chapter.

Postscript

I’m aware that its been quite a long time since I wrote one of this. I miss those days when I could be more myself. I have been quite busy lately with college admission processes as you have no doubt noticed with a decline in my rate of publication and engagement on the blog. I would like to clarify that this is NOT a book review. This is a preservation of my thoughts that were kindled by this book so I can refer back to them later.

Notes: The Millionaire Fastlane by MJ DeMarco

gs454236@gmail.com (Basil Labib) — Sat, 03 Jul 2021 21:02:21 +0530

Are you able to successfully leverage the opportunities at your disposal? That is the question that this book tries to answer and provides advice backed by the author’s own experiences. The book is written in a comfortable conversational style, including way too many metaphors and analogies.

The author, himself, has a remarkable lifestyle: starting a tech company during the dot-com bubble, growing it, selling it and so on. Below I have aggregated few core ideas from the book. Enjoy!

My highlights

Beliefs

Beliefs are powerful mechanisms that drive action, whether true or not.

What is wealth?

“Wealth is the ability to fully experience life” — Henry David Thoreau
Wealth is the state when each unit of money that you own earns more than its worth without you doing anything. (mine)
Wealth is composed of fitness (health), family (relationships) and, freedom (choice).

Luck on demand & Accountability

Luck is the residue of process.
“Responsibility is the price of greatness” - Winston Churchill
Responsibility is acknowledging your flaws. Accountability is modifying your ways to eliminate them.

Skills & Education

To trade time is to trade life.
Confined set of skills makes you expendable if demands for them becomes obsolete.
“The only thing that interferes with my learning is my education” — A. Einstein

build a machine for yourself.
Impact millions
Maximum control and leverage.
Wealth = Units sold * Unit profit + Asset value
Appreciable assets - businesses, brands, cashflows, notes, IPs, licenses, patents, inventions and real estates.
Passive income - earning income while not working
Start with $5m at 25, and let it compound. Wanna skip the first 30 years.
Become a producer first and a consumer second.
Business structures - C corp, S corp, LLC (Limited Liability Corporation)

Life choices

Poor choices are the leading cause of poverty.
Decisions made early in life are most impactful and irreversible.
Be willingly to accept your flaws.
“Ridicule is the tribute paid to the genius by the mediocrities” — Oscar Wilde
Create “free time” - time not spend working or recharging from work.
Pledge to never stop learning. Not from books but by engagement.
The acquisition and application of knowledge will make you rich.
Are you interested or committed?
Take intelligent risks.
Big dreams, materialistic or altrusic non-profit foundations, cost money.

Rules of thumb for business

- Need - “What’s in it for me?”
- Control - Over the variables
- Entry - barrier for competition, monopoly, license etc
- Scale - Units sold and Unit profit
- Time - business detached from your time
Live below your means with the intent to expand your means
Financial literacy - I mean, obviously

Entrepreneurship 101

The owner of an idea is not he who imagines it, but he who executes it.
Listen to people’s complains. Customers are foremost.
Look big to impress customers and intimidate competitors.
When supply exceeds demand, prices must drop, suddenly, the product becomes commoditized. Avoid such industries entirely.
Differentiation. Force innovation.
Be copied, never copy. (mine)

Partners:

Accountants and attorneys (among others) must be top-notch
Verify first, trust later
Spectacular product features cannot overcome poor services.

Branding

Build a brand. Rise above the noise.

Discipline & Focus

“…No life grows great until it is focused, dedicated, disciplined.” — Harry E. Fosdick
When you segregate your effort among assets, you build weak assets.

Notes: I Will Teach You To Be Rich by Ramit Sethi

gs454236@gmail.com (Basil Labib) — Tue, 15 Jun 2021 00:00:00 +0000

Sethi’s book, at it’s core, is a set of rules and tricks that can be applied by an aware and motivated individual to ensure a life of abundance relative to their current financial standings. Motivated to become rich himself (and hailing from India) at a young age, Sethi learnt from his blunders and noted his successes. He started blogging about his wins which eventually evolved into this book. Needless to say, his advice are well-researched, practical and tested. Do they work? It seems to.

This is my attempt to summarize the essential ideas presented in the book which is bore out of personal necessity as I am sure I will forget half of them (Speaking from past experience) in due course and will procrastinate till the universe cools down to open the book and reread it. Ergo.

Two caveats before we begin:

The book is dated. Use it as guiding rather than definitive. Research is key. Use the rather scant Terms section to look up artificially confusing financial terms.
The book is centered on the average American citizen. Find appropriate / equivalent schemes for your country of residence.

How to get rich in one line: Clear all debts. Choose the right accounts. Spend consciously. Automate money flow. Invest early and aggressively. Improvise and take action.

Rich or Sexy?

Getting started is more important than becoming an expert.
Ordinary actions get ordinary results.
Why do you want to be rich? (Hint: Because it sucks being poor).

Credit Cards

Two components: credit report and credit / CIBIL / FICO score.
Pay your credit bills on time. It’s free short-term loan. Get a no-fee card.
Rewards are important. Two or three cards are fine. Keep them active for long. Get more credit. Offers excellent consumer protection.
Small wins waste time.
Debt: Pay off the highest interest-incurring cards first. Negotiate lower APR. Setup aggressive automatic transfers to pay off.

Bank Accounts

Online savings account (NIYO, RazorPayX, Open) > Traditional savings account > Traditional current / checking account
Savings account: save up for longer-term goals. Less transactions. Current account: for frequent withdrawals.
Credit Unions: like local banks, not-for-profit, owned by customers.
Downside online savings acc: Few days for transactions to clear.
Talk to rep. Effective and important.

Setup investing

Open up 401(k), Roth IRA and an investment account with a discount brokerage firm (Or whatever is your equivalent in your country).
Setup automatic payments. Match 100% with your employee on 401(k). Go to Roth, then come back to 401 if still left.

Spending

Allocate spending money in “buckets”.
Rule of thumb: 60% expenses, 10-20% investing, 10% savings (or debt), 10% leisure (or debt).
Don’t just save - Save for a goal. Track spending weekly.
Increase revenue flow: Invest aggressively in yourself (health, education). Negotiate raise. Switch to higher-paying job. Do freelancing.

Automate

This provision	…should target
Paycheck	Investment acc; Direct deposit to checking account
Checking account	Investment acc 2; Savings acc; Credit card; Fixed costs (like rent); Unexpected
Credit card	Fixed costs; Leisure spending

Investing

Financial magazines, pundits, portfolio managers, advisers are nuisance. Cannot predict market 75% of the time. Manage yourself.
Preference: (Lifecycle funds) > Index funds > Mutual funds > Stocks, bonds
Major predictor of portfolio volatility: your mix of stocks and bonds. Your investment plan is more important than your actual investments.
Index funds: low-management fee (expense ratio). Rebalance allocation every 12-18 months.
Asset allocation: Check Swensen model
W. Buffett - “Be fearful when others are greedy and greedy when others are fearful”. That is, “Buy low, sell high”.
Ignore the noise.

Terms

credit score / CIBIL / FICO - number between 300 and 850; represents credit risk to lender; higher is better.
APR - Annual Percentage Rate. Interest rate to credit card companies.
Credit utilization rate - how much you owe divided by your available credit.
Life cycle funds or Target date retirement funds - “funds of funds”. managed. assets allocated based only on your age.
Stocks: Large-cap, Mid-cap, Small, cap, International, Growth, Value. Bonds: Government, Corporate, Short term, Long term, Municipal, Inflation-protected (TIPS). REITs.
REITs - Real Estate Investment Trust. Different than stocks or bonds.

Downsides

Okay, this might be a personal rant but the language of the book could have been more terse. This may be a demand my brain concocted from reading classics but formal language never hurts. Foregoing first-person addressing, frequent (and sometimes, redundant) jokes might have helped deliver the ideas in a more concise book thereby boosting the number of prospective readers who otherwise will shy away simply at the page count. As Cicero said, “When you wish to instruct, be brief”.

Maybe, just maybe, I would have been better off reading a classic.

Financial blogs

Get Rich Slowly - interesting
/r/IndiaInvestments wiki - great resource for Indian investors. Check “Recommended Reading” page (Another great collection of resources).
Zerodha Varsity - resource for investors. Newbie friendly.

Notes: The Richest Man in Babylon by George S. Clason

gs454236@gmail.com (Basil Labib) — Tue, 08 Jun 2021 00:00:00 +0000

Notes on “The Richest Man in Babylon” by George S. Clason.

What is wealth?

Wealth is a power. With wealth, many things are possible.

Essential Habits

A man’s wealth is not in the purse he carries. A fat purse quickly empties if there be no golden stream to refill it.
Fate is unpredictable hence untrustworthy. It makes wanton spenders and misers alike.
Every surplus can earn for you. And every revenue on that can earn for you.
Be frugal. Invest surplus.
Take advice about jewels only from the jewel merchant.
Determination is utterly important. If you set a task, complete it. How else can you be confident in yourself to do important things?
Counsel with wise men. Seek advice of men well versed in handling wealth.
Invest with extreme caution. Shady schemes are like sirens.
A part of all you earn is yours to keep.

Cures for a Lean Purse

Make it a habit to put aside a portion of your earning.
Each coin you spend must return 100% of its appreciated value.
Budget your expenses.
Compound Interest.
Security of your principal.
Own your own home.
Plan for the future.
Invest aggressively in ways of increasing revenue. Eg: Education.
Be Respectable
- Pay your debts with promptness.
- Take care of your family earnestly.
- Make a will of record.
- Have compassion over those who ain’t as fortunate as you are.

Luck and Opportunity

To attract good luck to oneself, it is necessary to take advantage of opportunities.
With wisdom, wealth can be secured by those who have it not.
Wealth that comes quickly goes the same way.
In the strength of your own desires, is a magic power. Leverage it.

Principles of lending

Help your friends in a way that does not bring their burden on you.
Emotional/Frivolous/Impulsive humans are not worthy of being lent.
Better a little caution than a great regret.

The Walls of Babylon

We cannot afford to be without adequate protection.
Thoughts of youth = bright lights of meteors that make the sky brilliant. Wisdom of age = steady light of fixed stars that are reliable enough to steer the course of sailors.

Power of determination

Innovation creates value.
Value is measured by wealth.
Wealth determines authority.

If a man has a soul of a slave, he will become one no matter what his birth.

Every woman longs to be desired.

Where the determination is, the way can be found.

Best Friend

Work is your best friend.