Skip to content

The Book That Changed My Financial Life 🤑

2021-12-09 · Long video (solo, talking head or whiteboard) · Ali · recording, 16:54 · watch on YouTube

Topic: Money and investing · mode: List of tips or lessons · tags: Lesson from a book, His own numbers, Sponsor segment present

In a Book Club episode on Morgan Housel's The Psychology of Money, Ali gives twelve money lessons in four parts (attitudes, getting, spending and protecting money), with his own examples: deciding against a tax move to Dubai, keeping about 30% of his portfolio in crypto while staying diversified, and changing his mind about paying off a mortgage.

What is said

The parts of the video and what is said in each (★ — how much it matters to the video).

00:00:00 — Intro: twelve lessons from The Psychology of Money in four parts

  • ★★ This Book Club episode, in Ali's series distilling highlights from his favourite books, gives twelve money lessons from Morgan Housel's The Psychology of Money. — 00:00:00 · Book Club

00:00:26 — Part one: attitudes towards money (different attitudes, luck, saying this is enough; the Dubai decision)

  • ★★ Ali's first lesson from The Psychology of Money: because people's different attitudes towards money affect how they earn and spend it, we should not be quick to judge what they do with their own money. — 00:00:29
  • ★★ For people born in the 1970s the S&P 500 grew tenfold between their ages of 13 and 30, while for those born 20 years earlier the market went nowhere, so the two groups see stocks very differently. — 00:00:29
  • ★★ Ali used to find it weird that more people do not invest in the S&P 500 or in crypto; after reading the book he says he needs to stop judging, since attitudes to money depend on circumstances. — 00:00:59
  • ★★ Ali's second lesson: do not underestimate luck in making money, because any outcome, in money or anything else in life, is some combination of luck, skill and unfair advantage. — 00:00:59
  • ★ Bill Gates, though super talented, was lucky to attend one of the very few US high schools that owned a computer, which got him coding and led to Microsoft. — 00:01:28
  • ★★ Morgan Housel (quoted): Morgan Housel argues that we should not study what individuals such as Elon Musk or Bill Gates did to get rich, but look at broader patterns that account for different people getting lucky at different times. — 00:01:28
  • ★★★ Ali's third lesson: learn to say "this is enough", because people keep moving their goalposts after each financial or career goal by comparing themselves with those above them. — 00:01:28
  • ★★ Ali says he has chased online income since about 13 and his income has compounded far past what any reasonable person would call enough, yet his comparison group keeps changing, from £100 to channels with millions of subscribers. — 00:01:57
  • ★★★ Ali likes Morgan Housel's reminder that we need to recognise when enough is enough rather than keep pursuing growth for its own sake. — 00:02:26
  • ★ Among the book's examples of rich people chasing more money, Bernie Madoff, already very rich, built a pyramid scheme to become richer and ended up in prison. — 00:02:55

  • ★★ Morgan Housel (quoted): Morgan Housel asks whether you really need the extra thing: there is no reason to risk what you have and need for what you do not have and do not need. — 00:02:55

    “there is no reason to risk what you have and need for what you don't have and don't need.”

  • ★★★ After his housemate Sheen moved to Dubai, Ali considered winding down his UK company and moving there to pay no corporation tax, VAT or income tax; after reading The Psychology of Money he decided against it, as he does not need the extra money and likes being near friends and family in the UK. — 00:03:25 · Sheen

00:03:54 — Part two: getting money (compounding, saving as much as you can, not screwing up)

  • ★★★ Ali's fourth lesson is to appreciate the magic of compounding: $1,000 in an S&P 500 index fund returning about 10% a year becomes $1,100 in year two and $1,210 in year three, as you earn gains on your gains. — 00:03:54
  • ★★ When The Psychology of Money was written, Warren Buffett's net worth was about $84.5 billion, of which $84.2 billion came after his 50th birthday and $81 billion after his 60th. — 00:04:23
  • ★★ Warren Buffett started investing at the age of 10 and had a million dollars in investments by 30. — 00:04:52
  • ★★ The book's maths shows that 99.9% of Warren Buffett's wealth came from compounding, because he started early and kept investing for decades. — 00:04:52
  • ★★ Morgan Housel (quoted): Morgan Housel writes that none of the 2,000 books picking apart Warren Buffett's success is titled "this guy has been investing consistently for three quarters of a century", though that is the key to most of it. — 00:04:52

  • ★★★ Morgan Housel (quoted): Morgan Housel advises saving as much as you can even without a specific reason: building wealth depends less on income or returns than on your savings rate, and savings equal income minus ego. — 00:05:21

    “savings equals income minus ego”

  • ★★ Ali agrees that the savings rate is the only variable he can really control: not much his income, and not at all the returns of stocks, Bitcoin or real estate. — 00:05:51

  • ★★ Balaji Srinivasan (quoted): Balaji, interviewed on Tim Ferriss's podcast, says a high savings rate and very low personal expenses give you much more freedom, since many people are tied to jobs they dislike by lifestyles that need a high income. — 00:05:51 · The Tim Ferriss Show
  • ★★ Ali sees little point in being miserable in a job for 80,000 hours of your life for a fancy house and a fancy car; the trade-off is probably not worth it. (hedged) — 00:06:20
  • ★★★ Ali advises lowering your personal expenses and raising your savings rate in whatever way you can, which gives more anti-fragility, freedom and autonomy to do what you actually want. — 00:06:49
  • ★★★ Ali's sixth lesson is to focus on not screwing up rather than big gains: Sue, who invests $1 every month no matter what, ends up better off than Jim, who buys as the market rises and sells as it falls. — 00:06:49
  • ★★ Losing money hurts more than gaining helps, Ali says, since losses can take you out of the game and extra money has diminishing returns; so think long term and avoid chasing the next Ponzi scheme or Dogecoin. — 00:07:18

00:08:05 — Part three: spending money (buy freedom, getting versus staying wealthy, don't be a flashy twat)

  • ★★★ Morgan Housel (quoted): Morgan Housel's seventh lesson is to use money to buy freedom: money's greatest intrinsic value is its ability to give you control over your time. — 00:08:05
  • ★★ Ali says many studies show income has diminishing returns on life satisfaction: beyond a point, around $75,000 in the US depending on who you ask, more money stops buying more happiness. (hedged) — 00:08:34
  • ★★★ Since time is our most valuable non-renewable resource, Ali says using money to buy extra time and freedom is a very good use of it, unlike pointless luxuries. — 00:08:34
  • ★★ Morgan Housel (quoted): Morgan Housel writes that getting wealthy differs from staying wealthy: getting money takes risk and optimism, keeping it takes humility and the fear that it can be taken away just as fast. — 00:09:04
  • ★★ Ali calls crypto highly volatile and says it could go up significantly; he has reasonably high conviction that it will. — 00:09:34
  • ★★ Ali keeps a fairly significant chunk of his investment portfolio, probably about 30%, in crypto. (hedged) — 00:09:34
  • ★★★ Ali's aim now is to keep the money he has and grow it slowly, so he wants to stay diversified across asset classes rather than move his stocks and real estate into crypto. — 00:09:34
  • ★★ Ali says withdrawing all his stock market returns and real estate investments to put into crypto would be a bad decision, since a fall would hurt his life far more than a tenfold rise would help. — 00:10:03
  • ★★ Morgan Housel (quoted): Morgan Housel tells his son that people who want an expensive car, watch or house really want respect and admiration, which expensive stuff almost never brings. — 00:10:03
  • ★★ Ali explains the man-in-the-car paradox: people admire the fancy car or house itself, imagining themselves owning it, not the person who has it, so buying expensive things to gain respect never works. — 00:10:32 · Tesla

00:11:01 — Part four: protecting money (room for error, no extreme commitments, reasonable rather than rational)

  • ★★ Morgan Housel (quoted): Morgan Housel argues there is no point being flashy about money you spend, because true wealth is the money you have not spent. — 00:11:01
  • ★★ Ali's tenth lesson, leave room for error: if you bank on money growing 7%, have a plan to survive if it grows only 4%, 3% or 2%, or falls. — 00:11:01
  • ★★★ Room for error is also emotional, Ali says: someone who saves two years of expenses to try full-time YouTube may not bear watching savings fall by half and quit early, so plan for emotions too. — 00:11:30
  • ★★★ Ali's eleventh lesson: avoid extreme financial commitments for your future self, such as splashing money while young because you will never buy a house or have kids, since you will probably change your mind. — 00:12:29
  • ★★ Psychologists call it the end of history illusion: people describe well how they changed over the past 10 years but are very bad at predicting how they will change over the next 10. — 00:12:58
  • ★★ Morgan Housel (quoted): Morgan Housel's twelfth lesson is to be reasonable rather than rational: good decisions are not always rational, because we are emotional creatures, not rational economic machines. — 00:13:27
  • ★★★ Before reading The Psychology of Money Ali could not see why anyone would pay off their mortgage, given cheap borrowing, faster stock growth and inflation; he now sees he discounted the security and better sleep of owning the house outright. — 00:13:57
  • ★★ If you are privileged enough and want to pay off a house in cash, Ali says do it: technically irrational, but what helps you sleep at night is what matters. — 00:14:26
  • ★★★ Ali advises ignoring a crypto bro's call to put 100% of your money into crypto if it makes you sleep worse: put in only as much as you are personally comfortable with. — 00:14:26

00:15:08 — Extended version on Nebula, CuriosityStream sponsor read and sign-off

Threads in this video

Where the stories that moved here went next

Mentioned

Central: compounding · Morgan Housel · The Psychology of Money · Warren Buffett

Also: People: Balaji Srinivasan · Bernie Madoff · Bill Gates · Elon Musk · Sheen

Projects: Book Club

Works: The Tim Ferriss Show

Organizations: CuriosityStream · Microsoft · Nebula · Tesla

Concepts: diminishing returns · end of history illusion · index fund · man in the car paradox · unfair advantage

Places: Dubai

Products: Bitcoin · Dogecoin · S&P 500

Also centred on compounding: 21 Life Lessons for Teenagers

Also centred on Morgan Housel: Improve your Reading + My New Favourite Pen

Also centred on The Psychology of Money: 15 Books To Read This Year

Replies to

← Previous: Reflecting On My Fears - Day in the Life · Next → 5 Lessons from Atomic Habits in Under 60 Seconds #SHORTS