Friday, December 27, 2019

Lessons from The Psychology of Money

In 2018, I came across this gem of an article "The Psychology of Money". This long article explains all the concepts and principles of money and investing into 20 nuggets. This is my distilled summary of it in a much easy digestible form. I have reordered them and also limited them to around 12.
Investing is perhaps the only field where someone with no education, no relevant experience, no resources, and no connections can vastly outperform someone with the best education, the most relevant experiences, the best resources and the best connections.

The above can't happen in medicine or engineering.

1. In my opinion, the most important concept is Anchored-to-your-own-history-bias. 

Our personal experiences make up of only 0.00000001% of the total possible scenarios of the world. But we tend to think that's mostly how the world works.

Think of it like a video game (a simulation), where and what you are going through is possibly a fraction of the total possible paths the simulation could have taken you through. But you erroneously believe that it is "the" main path. And then we start developing our own false and simple narratives of how the world works.

Best way to get out of this bias is to read a lot, keep an open mind and be emotionally sound.

Also, when everyone has experienced a fraction of what's out there but uses those experiences to explain everything they expect to happen - a lot of people eventually become disappointed or confused at other's decisions.

2. An over-reliance on past data as a signal to future conditions in a field where innovation and change is the life blood of progress.

It essentially means past-performance is not a guarantee of future success. So, avoid over-admiration of people who have been there, done that or lived through "a recession or down-turn". With all due respect, experiencing specific events does not necessarily mean you qualify to know what will happen next. Writers/analysts who correctly predicted past recessions might not be correct on what's next coming.

This also does not mean you should ignore history. The further back in history you look, the more general your takeaways should be.

3. Extrapolation of recent past into the near-future and then over-estimating the extent to which whatever happens in the near future will impact your future.

What just happened, might not happen again soon and assuming that is a mistake!
The fact that there is a spate of negative news when chips are down are probably a sign of extrapolation of the recent past in the near short-term future and must be steered away from.

4. Under-estimating the role of luck in financial success (and life in general).
Since it is hard to quantify the default stance is to simple ignore luck as a factor. Sometimes things happen that influence outcomes more than effort alone can achieve.

5. Allure of pessimism in a world where optimism is the most reasonable stance. 

Historian McCloskey said - 
"For reasons I have never understood, people like to hear that the world is going to hell".
6. Investing based on what others are doing is dangerous.

You start thinking others are doing something that you don't and jump on the bandwagon but they were playing a different game all this time. And you get disappointed.

Also, you should not look at crowds as an evidence of accuracy or as a confirmation of your actions. If you do what everyone is doing, you will get average results. 

7. Underestimating the impact of financial mistakes on psyche and emotions. 

On spreadsheets it looks something you can survive like a 30% drop but then you look at the kids, your family, and you become weak, and start having second thoughts with emotions clouding your judgement.

8. Key to financial success is doing the same thing for decades and also doing nothing.

Compounding remains the key to success and somehow the human mind cannot fully visualize and appreciate its power.
Also, do not stop/break compounding investments. 

9. Do not make "overly optimistic bets" where downside is utter ruin.

Some investment bets have an unacceptable downside in any circumstance. 
Think of it as Russian Roulette - a bullet is only in one chamber out of the 8 (or whatever the number is) and the odds are in your favor but the downside is complete ruin. 

You have to survive/stay in the game to have a chance to succeed.

Ability to do what you want, when you want, with who you want and why you want - is priceless, has infinite ROI and should not be put at stake for any investment bet.

10. Political beliefs need to be kept separate from investing.

Co-relation between politics & economics isn't clear and is very messy.
This graph tells everything 

11. Every money reward has a price beyond the financial fee.
See if you are prepared to pay for it. It could be emotional, material or inconvenience.

12. Wealth is what you don't see, the things not purchased.

Wealth is to control your time and provide you with more opportunities and options not to be used as a status symbol.

Wednesday, August 14, 2019

Leadership in Turbulent Times - Crying Need of The Hour

I had been meaning to read this book ever since I came across it and found it engrossing and a page-turner. Was able to finish it in a space of 3-4 days. The title is particularly captivating at first glance because you are reminded that there seems to be a huge void when you look for great leaders on the public sphere -no one comes close to the stature of four key men mentioned in this book. And they faced gigantic challenges and led and inspired the way out. So I definitely wanted to read and see what are those qualities that have gone missing over the period of time.

This book provides a great glimpse into the lives of arguably four of the Top 10 rankings presidents of the USA by public opinion. All of them had different upbringings, different challenges but all of them left an indelible mark on history. There are some common qualities among all four of them but then there are very contradicting qualities in all of them too. So it is very important to see and spot the pattern of what is it that helped shape them into the great leaders they turned out to be. 

The premise of this book is so captivating because it provides enough evidence to ponder over some classic questions like -
  • Are leaders born or made?
  • Where does ambition come from?
  • How does adversity affect the growth of leadership?
  • Do times shape the leader or the leader shape the times?
  • Why some people are able to extract wisdom from experience? 
  • While others in the face of adversity - they lose their bearing and their lives forever stunted?
Picked some of the sentences directly from the book as they were so well-written

Three of them on facing difficult times - withdrew themselves to some other place, activity where through reflection and adaptive capacity were able to transcend their ordeal armed with a greater resolve and purpose. (For Lincoln - it was law and study, Teddy Roosevelt - Badlands, FDR - Warm Spring Georgia where he recuperated and met others. LBJ is an exception).

Early Signs
  • He likened his mind to -

    I am slow to learn and slow to forget that which I have learned. My mind is like a piece of steel, very hard to scratch any thing on it and almost impossible after you get it there to rub it out.
  • Was extremely poor. Walked miles to borrow books to educate himself. 
  • Affable by nature. Was easy for him to strike conversations and form relationships with people. Also indicates he had a high degree of EQ. He was the source of his friends’ entertainment and also the lone dissenting (contrarian) voice when such cases arose - wasn’t afraid to face their disapproval rather than abandon what was right.
  • Crafted an intensive education for himself.
  • Avid reader.
  • Storytelling ability.

Adversity Struck

  • Suffered a blow to his public reputation when his home state Illinois plunged into recession and all his pet projects were stalled.

  • He valued his promises to the electorate very much.
How did he turn it around
  • Turned around his bad phase by withdrawing from public life and focusing on law practice. And he started to read beyond the boundaries of law like - philosophy, astronomy, science, political economy, history, literature, poetry and drama.
  • His pursuit of knowledge was directed towards understanding the role and purpose of leadership.

  • Did deliberate practice of storytelling by soliloquizing
    • Do we know what books he read?

  • Had an immense desire and ambition to inscribe his name on the book of communal memory. Wanted to emulate DeWitt Clinton. 
  • Extremely good orator. Inspired conviction in others because of the conviction of the speaker in himself.

Teddy Roosevelt
Early Signs

  • Roosevelt’s mind was "wax to receive and marble to retain. " Photogenic memory.
  • Was born into a well-to-do family but was physically weak so father arranged for all sorts of tutors in any field he showed interest in like Taxidermy, German etc.
  • Avid reader.
  • As a biographer wrote - “The story of Theodore Roosevelt is the story of a small boy who read about great men and decided he wanted to be like them.”
  • Widely read in all disciplines and well traveled at a young age.
  • Lacked empathy, kindness. But very curious, zealous and focused.
  • Storytelling ability.
  • Took interest in politics from college when many of the peers stayed away.

Adversity Struck
  • Lost his young wife and mother on the same day.
How did he turn it around
  • Left for the Badlands and started to live among the cowboys adopting their lifestyle in order to become familiar with the hardships as he was born in a well-to-family
  • Stayed there for two years - and made his body stronger (he was physically weak) and made himself mentally strong.

  • Perseverance was the key!
  • Start with a bang - believed in starting a new venture with style
  • Ask questions
  • When attacked, counter-attack and stick to your point.
  • Realized as a navy admiral - to keep space with the people he was supposed to command. It is the greatest possible mistake to seek popularity by showing weakness or mollycoddling with the men who then never respect a commander who does not enforce discipline.
  • Used to endorse the African proverb “Speak softly and carry a big stick”

Franklin Roosevelt
Early Signs
  • Lacked the physical strength of Lincoln and the torrential energy of Theodore. Was also born in a privileged class and an only child.
  • Great temperament is what set him apart!
  • Developed a desire to be the “nice child” so as to not trouble his sick father. This continued as he remained the “good student” in school earning him no friends.This tendency took shape in his adulthood as well where he learned to project optimism.
  • Also was passionate towards his hobby of collecting stamps.
  • Was interested in debating from the start.
  • Had decided to follow the footsteps of Theodore Roosevelt while in his 20s

Adversity Struck
  • Was struck by polio unaware.

How did he turn it around
  • He had the tendency to project happiness and optimism even if he was sad, lonely inside right from his childhood so as to not worry his parents.
  • Kept looking for alternative treatments for polio which at the time was not fully understood. (~1921)
  • Had a very supportive wife and a friend (Louis Howe) who had tied his future to FDR’s political career. Wife continued to represent him in political circles cultivating his prospective political allies while he recuperated and the friend strategized his comeback. Warm Springs, Georgia  - was key to his revival. 
  • He came to know about a spa in a ramshackle resort which had mineral water gushing from the nearby hillside at around 86 degrees. It was rumored to have therapeutic value and in his search for “alternative” treatment he wanted to try it out.
  • He could feel improvement so he took over the place, invested his own personal fortune and built it into a resort where other specially abled people could come and recuperate too.
  • He underwent a spiritual transformation developing a powerful new empathy enabling him to connect emotionally with all manners of people who fate had dealt an unkind blow.
  • Projected bright and happy mood even though deep down he was troubled. Good quality needed for a leader.
  • Experimental i.e always open to trying out new things - common sense to take a method and try it: If it fails, admit it frankly and try another. But above all try somethingWith this same approach - he treated his illness and the Great Depression.

Lyndon Johnson:
  • He was the only one out of the four who reacted negatively from the adversity - it magnified negative aspects of his nature. Later on a heart-attack helped him reshape his life's priorities.
  • FDR was his mentor but he even repudiated his mentor’s landmark achievement (the New Deal) to achieve some political gain.
  • He wasn’t a good public speaker so tried to balance it by “meaningful” one-to-one interactions.
  • Indulged in some fishy maneuvering to win the Senatorial race which he himself had been at the receiving end of in 1948
  • He had adopted the mantra of “getting ahead of the world by getting close to people who were head of things” aka kowtowing, pleasing people. Very calculating by nature.
  • No hobbies. Didn’t know how to unwind.
  • Used to work himself to the ground. Was a hard taskmaster.
  • Single-minded determination, enthusiasm, flattery