The Laws of Wealth book summary

Summary

The video script delves into the behavioral risks in investing, highlighting how our emotions and irrational biases can impede sound financial decisions. It emphasizes the importance of humility in assessing abilities, the influence of emotions on decision-making, and the value of seeking advice from financial advisors. The script also advises against panic reactions to market fluctuations, scrutinizing company management actions over words, and choosing value over glamour in stock investments. It concludes by advocating for aligning investments with personal goals and the simplicity of following a few key rules for successful investing.

Takeaways

• 📈 Behavioral Risk: Investors often overlook the impact of their own behavior on investment decisions, which can be influenced by emotions and irrational thinking.
• 🧠 Overconfidence Bias: Many people, including investors, tend to overestimate their abilities, which can lead to fundamental attribution errors and hinder learning from mistakes.
• 💭 Emotional Impact: Strong emotions, both positive and negative, can impair decision-making abilities in investing, as demonstrated by various psychological studies.
• 🤝 Value of an Advisor: Hiring an investment advisor can significantly improve decision-making and financial outcomes, especially during market crises.
• 🛡 Importance of Humility: Recognizing and addressing personal limitations and being open to learning from mistakes are crucial for becoming a good investor.
• 🚫 Avoiding Panic: Investors should not react impulsively to market fluctuations or sensational news, as these reactions can lead to poor investment decisions.
• 🔍 Evaluating Actions Over Words: When assessing a company's leadership, it's more effective to observe their actions, particularly their investment decisions, rather than relying on their statements.
• 💰 Investing in Value: Rather than being swayed by the allure of high-priced glamour stocks, investors should focus on value stocks that offer better growth potential and lower risk.
• 🌷 Caution with Novel Investments: The excitement around new and exotic investments can lead to irrational exuberance and poor investment choices, as seen in historical market bubbles.
• 🏆 Aligning with Personal Goals: Investors should tailor their investment strategies to their own financial goals and values, rather than blindly following others' advice or rules.
• 📚 Simplifying Investment Strategy: By adhering to a few key principles and avoiding unnecessary complexity, even novice investors can make sound investment decisions.

Q & A

What is the concept of 'behavioral risk' in investing as discussed in the script?

Behavioral risk in investing refers to the vulnerabilities and irrational behaviors of the investor themselves, which can negatively impact investment decisions. It includes factors like overconfidence, emotional reactions, and the tendency to make decisions based on feelings rather than rational analysis.

Why is overconfidence considered a bias in the context of investing?

Overconfidence bias is considered a problem in investing because it leads individuals to believe they have superior abilities or insights compared to others. This can result in taking excessive risks, disregarding potential losses as circumstantial, and failing to learn from mistakes, which hinders growth as an investor.

What is a 'fundamental attribution error' and how does it relate to investing?

A fundamental attribution error is a psychological phenomenon where people tend to attribute their successes to internal factors, like their own talent or skills, while blaming external circumstances for their failures. In investing, this error can prevent individuals from learning from their losses and improving their investment strategies.

How can emotions affect an investor's decision-making process?

Emotions can significantly impair an investor's ability to make rational decisions. Extreme emotional states, whether positive or negative, can lead to impulsive actions, such as making reckless investments when excited or panic selling during market dips when feeling fear or sadness.

What role does an investment advisor play in helping investors make better decisions?

An investment advisor provides critical support to investors by offering professional advice, helping them stick to their investment plans, and making more informed decisions. They can also act as behavioral coaches, helping investors manage their emotions and avoid making decisions based on temporary feelings.

Why is it important for investors to not overreact to market dips?

Market dips are a normal part of the investment cycle and typically do not affect the long-term value of a stock portfolio. Overreacting to dips by selling stocks immediately can result in losses, as it is usually wiser to hold onto stocks with the expectation that their value will recover over time.

How can evaluating a company's management actions help investors avoid falling prey to fraudulent schemes?

By observing the actions of a company's management, particularly how they invest their own money, investors can gain insights into the company's health and integrity. Insider buying can be a strong indicator of confidence in the company's future, whereas selling by insiders might signal underlying issues.

What is the significance of investing in value stocks over glamour stocks?

Value stocks are often less popular but offer greater potential for growth and are typically purchased at a fair price, making the investment less risky. Glamour stocks, while attractive due to their rapid rise in value, can be overpriced and risky, especially when bought at the peak of their popularity.

Why should investors be cautious about investing in novel and exotic investments?

Novel and exotic investments can be highly attractive due to their novelty and potential for high returns. However, they often come with greater risks and may not have a proven track record. Investors should be wary of being seduced by the allure of such investments without thoroughly assessing their substance and long-term viability.

How can aligning investments with personal goals and values help investors maintain a clear perspective?

Aligning investments with personal goals and values ensures that the investor's decisions are consistent with their long-term aspirations and needs. This clarity can help investors remain focused and avoid being swayed by market fluctuations or short-term temptations.

What is the advice given for new investors who feel overwhelmed by the amount of advice available on investing?

The script suggests that new investors should learn a few simple rules and ignore the rest of the advice. By focusing on key principles, such as not overreacting to market dips and investing in value stocks, novice investors can develop a solid foundation for making informed investment decisions.

Outlines

00:00

🤔 Behavioral Risks in Investing

The first paragraph addresses the psychological aspects of investing, emphasizing the concept of 'behavioral risk'—the idea that investors' own actions and emotions can pose significant risks to their investments. It points out that while investors are often aware of market risks, they may overlook the impact of their own irrational behavior. The paragraph discusses overconfidence bias, where people tend to overestimate their abilities, and how this can lead to poor investment decisions. It also touches on the importance of recognizing and learning from mistakes, as well as the influence of emotions on decision-making, using examples from social psychology experiments to illustrate the point.

05:02

📈 The Impact of Emotions and Advisors on Investment Decisions

This paragraph delves into the effects of emotions on investment choices, highlighting how both positive and negative emotional states can impair decision-making abilities. It references studies that show how strong emotions can lead to reckless behavior, drawing parallels to investment scenarios. The paragraph also underscores the value of having an investment advisor, who can provide critical support and help investors make better decisions, especially during market crises. It discusses the benefits of advisors in terms of financial yields and their role as behavioral coaches, offering a reality check against emotional decisions.

10:04

🚫 Avoiding Panic and Dodgy Companies in Investments

The third paragraph warns against the dangers of panic in the face of negative news about investments, such as company fraud investigations. It explains the human tendency to catastrophize and how this can lead to rash decisions based on fear. The paragraph advises investors to look beyond what company executives say and focus on their actions, particularly their investment in their own company's stock. It suggests that insider buying patterns can be a strong indicator of a company's potential, and it cautions against the allure of high-priced glamour stocks, advocating for value investing instead.

15:06

🌷 The Perils of Novel and Exotic Investments

This paragraph discusses the historical allure of novel and exotic investments, using the example of the tulip mania in the 1600s to illustrate the dangers of speculative bubbles. It draws a parallel to modern examples, such as the dot-com bubble, to highlight how excitement for new and innovative ventures can lead to irrational investment decisions. The paragraph advises investors to be wary of such enthusiasm and to make rational assessments based on a company's substance rather than its allure.

20:06

🎯 Aligning Investments with Personal Goals

The fifth paragraph emphasizes the importance of aligning investment strategies with personal financial goals and values. It suggests that investors should determine their own benchmarks for financial security and use these to inform their investment choices. The paragraph also discusses the power of language in shaping financial behavior, suggesting that explicitly naming the purposes of savings and investments can motivate better financial habits. It concludes by advising investors to focus on a few simple rules and to ignore the overwhelming amount of advice available, advocating for a systematic approach to investing based on personal needs and values.

Keywords

💡Behavioral Risk

Behavioral risk refers to the potential negative impact on investments caused by the psychological and emotional factors of the investor. In the video, it is highlighted as a significant factor that investors often overlook, emphasizing that our own irrational behavior can be a greater threat to our investments than market conditions. For instance, the video mentions how investors can become panicky or overemotional, which can lead to poor decision-making.

💡Overconfidence Bias

Overconfidence bias is a cognitive bias where individuals overestimate their abilities or the accuracy of their predictions. The video illustrates this concept with the example of American high school students believing they are better at math than the global average, despite being average. This bias is relevant to investing as it can lead to a fundamental attribution error, where investors attribute success to their abilities but blame external factors for failures, hindering learning from mistakes.

💡Emotional Decision-Making

Emotional decision-making refers to the influence of emotions on the decision-making process, which can impair rational judgment. The video discusses an experiment by Jennifer Lerner, where participants who watched a sad movie made less optimal decisions when selling pens compared to those who watched a neutral video. This concept is crucial in investing, as strong emotions can lead to reckless decisions, contrasting with the need for a cool-headed approach.

💡Investment Advisor

An investment advisor is a professional who provides advice and guidance to investors on managing their portfolios. The video emphasizes the importance of hiring an advisor to help make better investment decisions and to stick to investment plans. It mentions that investors with advisors outperform others by 2-3% per year, highlighting the substantial financial benefits of professional guidance, especially during market crises.

💡Fundamental Attribution Error

The fundamental attribution error is a psychological phenomenon where people tend to attribute their successes to internal factors, like their own abilities, while blaming external circumstances for failures. The video explains that in investing, this error can prevent individuals from learning from their mistakes, as they may incorrectly believe that market losses are out of their control rather than a result of their own actions.

💡Catastrophizing

Catastrophizing is the tendency to imagine the worst possible outcome in response to a negative event. The video describes how investors may react to market dips by imagining the most dire consequences, such as financial ruin, which can lead to irrational selling of stocks at a loss. This behavior is counterproductive, as market corrections are normal and temporary.

💡Insider Buying

Insider buying refers to the act of company executives or insiders purchasing shares of their own company, which is often seen as a sign of confidence in the company's prospects. The video cites a study showing that companies with significant insider buying patterns outperformed others, suggesting that observing the investment actions of company insiders can be a valuable indicator for investors.

💡Value Stocks

Value stocks are shares of companies that are considered undervalued by the market, often because they come from smaller or less popular companies. The video contrasts value stocks with glamour stocks, advising investors to seek value over popularity. Value stocks are seen as less risky investments because they have room for growth and are purchased at a fair price.

💡Glamour Stocks

Glamour stocks are shares in companies that are popular and have fast growth, often from startups. The video warns against investing in glamour stocks at the peak of their popularity, as they can be overpriced and may not increase in value significantly, leading to potential losses when the bubble bursts.

💡Novel and Exotic Investments

Novel and exotic investments refer to new and unusual investment opportunities that may attract investors due to their novelty or uniqueness. The video uses the example of the tulip mania in the 1600s to illustrate the dangers of investing in such assets, which can lead to speculative bubbles and eventual crashes, highlighting the need for caution and rational assessment.

💡Personal Financial Goals

Personal financial goals are the individual objectives that guide an investor's financial decisions and investments. The video emphasizes the importance of aligning investment choices with one's own values and needs, rather than following general rules or comparing oneself to others. It suggests that understanding and articulating these goals can help investors maintain a stable investment strategy during market fluctuations.

Highlights

Investors often overlook the behavioral risk that stems from their own vulnerabilities.

Behavioral risk includes irrational behaviors and emotional responses that can affect investment decisions.

Overconfidence bias can lead to an inflated sense of one's abilities and hinder learning from mistakes in investing.

Emotions can significantly impact investment decision-making, with both positive and negative emotions potentially leading to reckless choices.

Hiring an investment advisor can provide critical support and help investors make better decisions.

Advisors can act as behavioral coaches, assisting investors in managing their emotional responses to market changes.

Investors should avoid making decisions based on panic, as market corrections are normal and not always indicative of long-term issues.

Evaluating a company's management by their actions, not their words, can provide insight into the company's health and investment potential.

Insider buying patterns can be a strong indicator of a company's potential for growth and success.

Investors should be cautious of the allure of high-priced 'glamour stocks' and instead focus on value stocks with room for growth.

The historical tulip mania serves as a cautionary tale against investing in novel and exotic assets without due diligence.

Investors should align their investment strategies with their personal financial goals and values.

Labeling savings and investments with specific goals can motivate individuals to save more effectively.

Learning a few simple investment rules and ignoring the rest can help investors avoid becoming overwhelmed by advice.

Investors should not overreact to market dips and should focus on purchasing value stocks instead of glamour stocks.

Transcripts

daniel crosby

the laws of wealth

psychology and the secret to investing

success

when you invest in stocks you're always

weighing up risks against a possible

return

but what if there is a whole area of

risk that you're not aware even exists

investors are used to being cautious

about the risks of the market as a whole

such as a stock market crash or the

health of a particular company

but one of the greatest risks to our

investments comes not from the stock

market but from ourselves

behavioral risk or the vulnerabilities

of the investor herself is one of the

key factors to grapple with when

investing

like it or not we are irrational we get

overwhelmed by information and can

become panicky or over emotional

while we may fancy ourselves intuitive

and astute our judgment can be clouded

by slick sales pitches and clever

one

we overestimate our abilities in life

and when we invest

from an early age it's drilled into us

that we should think positively and have

confidence in ourselves and our skills

but what if that confidence is actually

holding us back

in one revealing study american high

school students were asked about how

they thought their math skills compared

to those of the rest of the world

a vast majority assumed that they were

some of the best internationally

the truth is that american students are

average at math

this is an example of overconfidence

bias

that is people assume incorrectly that

they perform in a manner that is

superior to other people

in a similar vein organizational

researchers tom peters and robert

waterman conducted a study in which they

asked employees to compare themselves to

each other and rate themselves on such

qualities as interpersonal skills and

physique

one hundred percent of the respondents

thought that they were better than

average at interacting with other people

ninety-four percent believed that their

athletic prowess outranked that of their

peers

not everyone they interviewed could have

been a master of diplomacy with a

bodybuilder's physique

evidently the respondents overestimated

themselves

but what can a little self-confidence

hurt

even if it's misplaced

isn't it better than being horribly

insecure

well when it comes to investing having

an inaccurate view of your abilities can

hurt very much

if you believe that you have exceptional

abilities you will likely credit any

wins on the stock market to your unique

talent

however you'll believe that any losses

are circumstantial and out of your

control

that is called a fundamental attribution

error

it states that we're unable to judge the

effects of our actions accurately

this perspective keeps you from learning

from your mistakes and growing as an

investor

you may think that the roles of the

stock market don't apply to you

that can lead you to disregard risk and

make reckless decisions because you're

so confident in your instincts

you might also be less likely to seek

outside help from a trusted advisor

being humble about your abilities and

being able to identify and learn from

your mistakes are key to becoming a good

investor

two

our emotions can affect our ability to

make good decisions

who doesn't love sobbing while watching

a sad movie or feeling excitement

flooding through your body when falling

in love

extreme emotional states make life

interesting

however when it comes to investing

extreme emotions can impede your

decision-making skills

in an experiment conducted by social

psychologist jennifer lerner

participants were divided into two

groups

one group was instructed to watch a

scene from a sad movie and then write

about it

the other group was given a short boring

video clip about fish to watch

afterward they were asked to write about

their daily activities

the researchers then conducted a second

behavioral experiment in which they

asked the same participants to pretend

that they were selling and buying pens

they found a marked correlation between

good decision-making and a lack of

strong emotion

sellers in the group that watched the

boring movie were much shrewder when

deciding how much they should sell their

pens for

overall they charged 33 more than the

group that watched the sad movie

so a sad investor is potentially a

gullible investor but what about

positive emotions like excitement

in his 2009 book predictably irrational

the hidden forces that shape our

decisions

behavioral economist dan ayerly

published the results of an experiment

designed to assess the effect of

excitement on decision-making

he interviewed a group of students about

their sexual practices asking questions

like

would you cheat on a partner and would

you have sex without a condom

when first asked these questions most

students answered both with no

the researchers then showed the same

group of students some pornographic

images

they then repeated the same questions

with some surprising results

students answers reflected that they

would be 136 percent more likely to

cheat on a partner and 25 percent more

likely to have unprotected sex than

before they had viewed the images

feeling passion and excitement had made

these students much more reckless

they knew perfectly well that their

behavior was irresponsible but in the

heat of the moment they weren't able to

practice restraint

the parallels with investing are obvious

of course investing is not like watching

porn however making nail-biting deals

involving such high personal stakes can

also elicit strong emotions

as we have seen both positive and

negative emotions can affect your

decision-making abilities

but how do we learn to keep our cool and

make rational decisions

one of the best ways is to get an

investment advisor

three

one of the best investing decisions you

can make is to get an advisor

investors may have all the rules in

their heads they may have read a zillion

books and learned that they need to plan

carefully and avoid impulse buying

however knowing is not enough

this is why hiring an advisor is

essential

research has shown that advisors have a

critical influence on helping investors

make better decisions and stick to the

investment plans they've chosen

this assistance translates into

substantial financial yields

financial analysts morningstar estimate

that investors with advisors outperform

other investors by two to three percent

per year

advisors can offer essential support

during a crisis

imagine that you had invested your

entire life savings only to see the

market plunge in the financial crisis of

2008

it would be enough to send any investor

into a panic

indeed most investors struggled during

the period following the crash

however financial consulting firms aeon

hewitt and financial engines

found that investors who had assistance

during the critical years of 2009 and

2010 actually outperformed other

investors by 2.92 percent

advisors don't just help their clients

to weather difficult periods by

providing lists of statistics and

probabilities

the best advisors also act as behavioral

coaches giving their clients a much

needed reality check when it comes to

their emotional decisions

for example advisors can be professional

devil's advocates helping you do a

pre-mortem when considering an

investment decision

by asking you lots of challenging

questions they can help you to think

through everything that could go wrong

with an investment

when you're full of enthusiasm this may

be the last thing you feel like doing

but it could save you major losses if

the potential investment survives the

pre-mortem then it might just be a

winner

of course not all advisors are good or

right for what you need

before hiring someone make sure that you

interview her rigorously about her

credentials investment philosophy and

communication style

most importantly make sure that along

with investment advice she's also a

master at behavioral coaching

as we have seen this is where the most

value lies

four

don't panic about investment panic

imagine investing part of your life

savings in a company only to hear that

the company is being investigated for

fraud

chances are you'll be flooded with

feelings of panic

unfortunately as an investor you'll be

bombarded with information by news

organizations hungry for scandal and

disaster

if you're not careful you'll be unduly

influenced by such reports and end up

acting out of fear instead of good sense

humans have a tendency toward

catastrophizing

that means that as soon as you hear

something alarming you will immediately

start imagining the worst consequence

that could result

hear that your stock has taken a little

dip

next thing you're probably imagining

that you will live out your retirement

on the street relying on your grown

children for handouts

while the media treats every dip in the

stock market as an alarming crisis

in fact it is very normal for your

stocks to lose value from time to time

sometimes the value of stocks is over

inflated and when this happens people

start selling their stocks on mass to

profit from the high prices

this leads to the value of the stocks

plummeting sometimes losing over 10

percent of their value

this is called a correction and it

happens approximately once a year

these dips actually don't affect the

value of your stock portfolio in the

long term however if your reaction is to

sell your stocks immediately then your

portfolio will suffer as you'll be

selling them at a loss

ironically we're most scared at times

when the market is actually safest

in times of great prosperity you may

feel very confident

however high valuations can be an

indication of a bubble

once the price drop has happened and the

market has corrected itself you may feel

terrible but in fact it is an indication

that the market is much safer because it

reflects a more accurate valuation

so make sure that you don't jump at the

first sign of trouble

weathering tremors in the market is part

and parcel of being a successful

investor

five

learn to identify a dodgy company by

evaluating what the management does not

what it says

we've all heard the cautionary tales

about con artists operating on wall

street

nobody wants to be suckered into

investing in the next ponzi scheme

but how can we avoid falling prey to the

bernie madoffs of this world

we may like to think that we'd be able

to see through a con artist relying on

our intuition and powers of detection

unfortunately research has shown that

we're terrible at detecting when someone

is lying

in a paper published in personality and

social psychology review in 2006

psychologists charles bond jr and bella

de paolo analyzed the results of 200

studies about how people detect lies

they discovered that only 47 percent of

the time could people spot liars by

studying their body language

that means that you'll be more likely to

determine who is lying by flipping a

coin than by analyzing their behavior

even people with expert training are bad

at spotting liars

in an experiment conducted in a prison

law enforcement professionals were asked

to tell the difference between a true

confession from a prisoner and a fake

one

they were successful in only 42 of the

time

so what does this mean for us as

investors trying to decide whether we

can depend on the leadership of a

company

put bluntly we have to stop listening to

what executives are saying and start

looking at what they're doing

specifically we need to look at how they

are investing their own money

the managers of a company have the most

intimate possible information about

their own business

is that inspiring them to buy their own

stock or to sell it off as quickly as

possible

a study by the private investment firm

tweety brown published in 1992

found that companies with significant

insider buying patterns outperformed

other companies on the stock market

they gained two to four times as much

value during the same period

if insiders are betting on a company it

is likely to be a very good bet indeed

instead of fighting a losing battle to

try to determine whether leaders are

telling the truth about their companies

just look at where they invest their own

money

actions really do speak louder than

words

6.

the highest price isn't always right

so when investing go for value over

glamour

would you pay 52 dollars for an old

burnt oven mitt

what if you were told that it was the

oven mitt that it belonged to none other

than the famous chef and cookbook author

julia child

and that it had gotten burnt as she was

making her first ever batch of delicious

beef bourguignon

chances are you'd be much more willing

to reach into your pocket to acquire

something with such an interesting and

socially significant past

when it comes to buying stocks we have

to be aware of how irrational we can be

about pricing

in fact we often believe that a product

is valuable just because it is expensive

rather than evaluating it on its

objective merits

stanford professor baba shiv conducted

an experiment in which he measured

participants brain activity in an fmri

machine as he fed them droplets of wine

he told him that some bottles of wine

cost ninety dollars per bottle and

others only ten dollars

the scan showed that the pleasure

centers in people's brains lit up much

more when they were drinking the wine

that they were told was more expensive

however as you might have guessed all

the samples were exactly the same

just believing that the wine was more

expensive made them derive more

enjoyment from it

assuming that price is the same as

quality may not be such a big deal when

it comes to buying wine but there can be

terrible consequences if you use that

reasoning to buy stocks

glamour stocks usually come from

startups and fast growing companies

they rise in value quickly and are very

appealing to investors

however if you buy those stocks at the

height of their popularity you may make

an unprofitable investment

you're paying a lot of money for

something that is probably not going to

increase in value substantially and may

even lose money when the bubble bursts

if you really want to make a sensible

investment in the stock market you need

to invest in value stocks

these are stocks that are often rather

unpopular because they come from

companies that may be smaller and thus

lack brand recognition or social cachet

they certainly won't be the highest

priced

this means that they have room to grow

in value and seeing as you have paid a

fair price for them your investment is

much less risky

picking a value stock is counter

intuitive like choosing the kid who gets

picked last for the basketball team

instead of the popular lanky jock known

for scoring

but just like the unpopular kid might

surprise you by putting up a steady and

solid defense the value stock may be

likely to live up to its name quietly

gaining ground while glamour stocks soar

and then crash

7.

be wary of being seduced by novel and

exotic investments

in the early 1600s the tulip came to

prominence in the netherlands

people were astonished by its beautiful

color and an exotic shape they had never

seen in a flower before tulips became

the ultimate status symbol

as demand increased so did the price

people became willing to pay up to 10

times a worker's annual salary for just

one bulb

in 1637 the tulip frenzy spectacularly

crashed in what is thought of as the end

of the first speculative market bubble

what is it about the new and exotic that

elicits such great enthusiasm

after all the tulip bubble has been

repeated over and over in economic

history

a much more recent example is of course

the dot-com bubble which had many

casualties

people were so excited by the seemingly

endless possibilities of the internet

that they thought any investment ending

in dot com would be a sure bet

for example an internet startup called

etoys.com

founded in 1997 had attracted a

mind-boggling investment of eight

billion dollars by 1998 even though it

could only report 30 million dollars in

actual toy sales

in contrast the conventional boring toy

company toys r us could boast 40 times

as much in sales with only a 6 billion

investment

they also had a website but as they were

seen as traditional and old-fashioned

they didn't provoke investors excitement

in 2001 etoys.com went bankrupt and it

was later bought out by toys r us

investors had been prevented by their

excitement from making a good rational

assessment of the company

a similar story can be seen with air

travel an industry synonymous with

exoticism and excitement

thanks to air travel a journey that used

to take several weeks by ship can now be

made in the space of a day

the impact on how we live work and think

about the world has been immeasurable

investing in this industry for the

purpose of making money however has

always been a losing battle

with enormous fixed costs strong labor

unions and rigid pricing models

investors in air travel have

historically lost money

so when tempted to invest in something

exciting and new we should all bear in

mind the image of that beautiful exotic

tulip with the tantalizing colored

petals

yes it is lovely to look at

but is there substance behind that

beauty is it really worth ten times your

annual salary

eight

we need to invest our money according to

our personal goals

rather than other people's rules

how much money is enough

there are so many different ways to

answer that question

you could look at guidelines that say

you need to have 10 times your annual

income saved to be financially

independent or you could compare

yourself to your neighbors and decide

that when you have a fancier ferrari

than theirs then you'll be doing well

the best way to answer that question is

actually to look inward rather than

outward

each of us has a unique hierarchy of

needs the things that are most important

to our fulfillment in life

after the obvious common human needs

like food and housing have been met

personal needs can differ

wildly some people need several times

their annual income and savings to feel

secure and pay for their children's

college education

for others it's much more important to

have ready cash at hand to fund

experiences like traveling the world

these values are your personal benchmark

and they will determine how you invest

having this benchmark clearly

articulated to yourself

can help you survive the turbulence of

the market with your mental health

intact

for example if you know that you will

only need to access your savings in 15

years you won't be so concerned about

every dip in the market because you know

that there's time for the value of your

stocks to recover

on the other hand if you are currently

supporting an elderly parent with

unpredictable health care costs you need

an investment plan that is less risky in

the short term and which will allow you

to access money quickly if you need to

so how do you make sure your financial

decisions align with your goals

one important way is actually to change

how you talk about your money

former u.s president barack obama and

his advisors knew the power of language

very well when they decided to label the

money pumped into the economy after the

great recession a bonus

people were more likely to see it as

something extra and spend it immediately

rather than save it

we can use this behavioral psychology to

our advantage if we explicitly name what

the purposes of our savings and

investments are

one study showed that low-income couples

were much more likely to put money aside

for their children's college education

if they deposited it in an envelope that

had a picture of their children's faces

on it

it can be very motivating to know why

you are investing your money

next time you're considering making an

investment think carefully about your

own needs and values and make sure that

the decisions you make align with your

goals and dreams

the author asserts that one of the main

risks to investors comes not from the

stock market but from their own behavior

we are often emotional irrational and

prone to grandiose thinking we need to

learn how to recognize these weaknesses

and take steps to combat them by getting

outside advice and investing

systematically according to our personal

goals

as for what you can do now

learn a few simple rules and ignore the

rest of the advice you receive

it's easy to become completely

overwhelmed by the volume of advice

available about investing

however you don't need to become an

expert on the stock market in order to

become a good investor

just like an amateur poker player can go

far if he simply learns to fold his

worst hands and bet on his best ones a

novice investor can become very

competent just by following a few simple

rules

for example he should learn not to

overreact to dips in the market and make

sure to purchase value stocks instead of

glamour stocks