Insights from ‘The Psychology of Money’ by Morgan Housel Flashcards
What is the key idea behind compounding in wealth accumulation?
The concept that small, consistent gains, when compounded over time, can grow exponentially into significant wealth.
How much money would you have on January 31st if you start with $1 on January 1st and double it daily?
1073741000
True or False: Delaying investment compounding by even a week can drastically reduce total returns.
True
Who is considered the best investor of all time due to his long-term compounding strategy?
Warren Buffett.
How much of Warren Buffett’s wealth was accumulated after his 65th birthday?
Approximately $82 billion out of his $86 billion.
Which rule about compounding is attributed to Charlie Munger?
‘The first rule of compounding is to never interrupt it unnecessarily.’
Why did Rick Guerin, Warren Buffett and Charlie Munger’s former business partner, fail to achieve similar wealth?
He leveraged heavily and was forced to sell during a market drop due to margin calls.
What is volatility in the context of stock markets?
The daily fluctuations in market prices, which are the emotional cost of high returns.
How should one view volatility according to Morgan Housel?
As a fee rather than a fine, meaning it’s a necessary cost for achieving high returns.
Why do some investors prefer low-volatility assets?
They find it challenging to emotionally handle the market’s ups and downs.
Give an example of a successful ‘tail investment.’
Amazon Web Services (AWS), which became one of Amazon’s most profitable divisions despite starting as a small project.
What is a ‘tail investment’?
An investment that greatly outperforms others and compensates for several less successful investments.
True or False: It is wise to put all your money into a single investment you believe will succeed.
False
How does the Russell 3000 index illustrate the power of tail investments?
Only about 7% of companies drove the index’s 73-fold return since 1980, despite nearly half the companies losing money.
According to Morgan Housel, what proportion of investments can fail and you can still make a fortune?
You can be wrong half the time and still make a fortune if you have a few huge winners.
