Things of status and willingness to take risks do not at all bring you closer to wealth.
Morgan Housel, a partner at the Collaborative Fund and former columnist for The Motley Fool and The Wall Street Journal, wrote an essay entitled The Psychology of Money. In it, he talks about two people. The first person is Grace Groener. She was orphaned at the age of 12 and never got married.
For most of her life, the woman lived alone in a small house and worked as a secretary. After her death, she left $ 7 million for charity. The people who knew her did not understand where Grace got so much money from.
She simply made savings from her modest salary and invested them in the stock market.
The second person is Richard Fuscone, former vice president of the Latin America division of investment bank Merrill Lynch. He received a good education and became so successful in his industry that he retired at 40. And later, he declared personal bankruptcy, which led to large loans and illiquid investments.
Haussel notes that in any other industry, this development is impossible. There is no way that Grace Groener performs better heart surgery than a trained cardiologist. But in investing, it is real if you approach money management correctly. But wrong beliefs get in the way. Here are some of them.
Partner with the Collaborative Fund and former columnist for The Motley Fool and The Wall Street Journal.
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1. Everyone gets what they deserve
The role of luck in financial success is often underestimated because it cannot be measured. Well, it is somehow impolite to believe that a person took place only by chance. It’s the same with failures. It seems that those who fail are not trying hard enough, not thinking everything through, or being lazy. This is not always the case, but we, by default, attribute failures solely to errors. And therein lies the problem.
A person’s life is a reflection of his experience, acquaintances, and also a series of accidents.
You cannot believe in risk and not believe in luck because these are two sides of the same coin. They demonstrate that sometimes things happen that influence results more than effort.
Some people are born into families where education is encouraged, while others are born the opposite. Some live in a country with a thriving economy conducive to entrepreneurship, others in war, and poverty. Wealth can certainly be earned. But not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when you judge people, including yourself.
2. Experience is the best advisor
Bias always leads to failure. Your personal experience is perhaps 0.00000001% of what has happened in the world. And you, most likely, explain 80% of the phenomena to them. Do you feel the abyss between these numbers?
Depending on the place and time of birth, the past of a particular family, a person grows up with completely different ideas about the world and the economy. If you make decisions based on your own experience, there is a great risk of disappointment.
So if you are confused by other people’s strategies for investing or saving money, try to analyze them with an open mind. Perhaps they make sense.
3. History helps to model the future
The history of humanity is a series of accidents and changes. Using it as a guide to the future is rather strange. And this also applies to finance. Change is the cornerstone of the economy. For example, the venture capital industry didn’t exist 25 years ago. Or take the S&P 500, which includes the stocks of America’s 500 most successful companies. Until 1976, financial stocks were not included in it, and today they make up 16% of the index. Again, history is useless here.
Over time, the rules of accounting, disclosure, auditing and market liquidity have changed. Everything has changed.
Therefore, the success stories of others should be used only for inspiration. Doing the same will not necessarily lead you to the same result.
However, all this does not mean that the past should be ignored when it comes to money. You can analyze how people respond to stress and stimuli, greed, and fear because this is eternal.
4. Pessimism is a more realistic strategy than optimism
If a more or less prominent person writes that there will be a recession, his post will be re-posted. He will mention that there will be a big recession – and they will call him from the newspapers. The promise of the Great Depression will bring him to television. The story that there are good times ahead will not cause anything like that. One of the reasons is the huge number of scammers who promise mountains of gold. Therefore, optimism is more alarming than instilling confidence.
That being said, there are rational reasons for choosing positive thinking. After all, optimists are not those who believe that everything will be fine. They believe that the chances of a successful outcome are higher over time, even if there are setbacks along the way. There are no guarantees here. Just the idea that everything can be done a little better and more productively makes life more enjoyable. And from the thought that there are only failures ahead – on the contrary.
5. It’s worth investing in science
Harry Markowitz received the Nobel Prize in Economics for creating formulas that tell you exactly how many stocks or bonds should be in a portfolio, depending on the appropriate level of risk. Several years ago, a correspondent for The Wall Street Journal asked the laureate how he invested his own money. He answers investing Experts Urge ‘Do as I Say, Not as I Do’ that his strategy is to minimize future regrets. So his portfolio is structured on a 50-50 basis.
There are many things in the academic understanding of finance that are technically correct but cannot describe how people operate in the real world. A large number of scientific papers are helpful. But their main goal is often to impress other scientists.
Researchers strive for exact rules and formulas, and the real world, by its very nature, avoids precision. Therefore, what often matters most in finance will never be appreciated by the Nobel Committee. And this is humility and the ability to make mistakes.
6. Wealth is reflected in high-value purchases
If you see someone in a $ 3 million car, you might think they are rich and successful. Though all that can be said is that he was 3 million richer before he bought the car. Or he rents this car. Expensive things don’t say anything about people. Many of these people are not that successful and spend most of their money on status purchases.
We tend to judge wealth by what we see. We cannot see bank accounts or brokerage statements, so we rely on external signs: cars, houses, photos from Instagram. But all this is easy to fake.
In fact, wealth is what you don’t see.
These are the cars that remained in the showroom. Diamonds that are not bought. These are assets in the bank that have not yet been transformed into what can be seen. When people say they want to be millionaires, what they really mean is, “I want to spend a million.” And that is literally the opposite of being a millionaire.
Wealth is all about empowering you to choose. The financial assets on the balance sheet do just that.
7. You have no room for error
People underestimate the right to make mistakes in almost everything about money. But it is this awareness that helps to be more resilient and patient. Big wins do not often happen simply because you need to either wait for a good chance or work hard. So the person who leaves himself room to maneuver in the event of a mistake has an advantage over the one who ends the game on failure.
The psychological moment is important here. Perhaps from a financial point of view, you will experience a 30% decline in your assets. But what will it do with your emotions? There is a chance that you will burn out and give up everything exactly when great opportunities open up before you.
8. Finance is directly related to passion
If the pressure of the average person rose by 3%, it would hardly have affected anything. But if the stock market drops 3%, almost everyone will react. The reason is that finance has an entertainment function. There is competition, rules, chagrin, victories, defeats, heroes, villains, teams, and fans. It’s practically a sporting event!
When making financial decisions, it’s helpful to constantly remind yourself that investing is to maximize returns, not minimize boredom. When there is no excitement, this is completely normal. If you want to formulate this as a strategy, use the thought: opportunities await where there are no other people because they think it is boring.
9. He who does not take risks does not drink champagne
The risk is important, but it must be justified and meaningful. For example, when playing Russian roulette, the statistics are on your side. But none of the potential gains will cover what can happen if you fail. Therefore, if your financial risk can end in complete ruin, then its likely growth is not worth it, even if there is a chance of success.
10. What happened in the recent past will continue in the future
A widespread property of the psyche is the tendency to believe that what has just happened should continue. And this affects our behavior. Expectations of new successes or failures accompany each major financial gain or loss. For example, after the stock market fell 40% in 2008, another imminent collapse was predicted for many years.
However, in most cases, if something significant happens, then it no longer repeats. And if it does happen again, it doesn’t – or shouldn’t – affect your actions the way you tend to think. Because expectations supported by recent circumstances are short-term, and financial goals are long-term.
A stable strategy that can withstand any change is almost always superior to that associated with recent events.
Adapted by Wiki Avenue Staff
Sources: Life hacker