Master the Three Money Misunderstandings

Master the Three Money Misunderstandings

Introduction:-

I recently read the psychology of money by Morgan Housel.Having more money will make you happier, if having more money means you have more control over your time.

Billionair charlie munger once said "I did not wanted to get rich I just wanted to get independent".

If you want to attain the kind of wealth which awards you the freedom to Do  What you want,When you want ,With whom you want.You must think differently about money and develop a strong investing psychology by understanding three concepts that most people failed to understand.I call these The Three Money Misunderstandings.

Money misunderstandings:

1.Compounding:

If I give you a dollar on january 1st and double it every day after that. 2 dollars on january 2nd,4 dollars on january 3rd ,8 dollars on january 4th.How much money would I have to give you on january 31st?A  thousand dollars?Ten thousand dollars?

Well if you undersand the power of compounding.You know that you stand to make much much more than ten thousand dollars on january 31st .By compunding one dollar at 100% for 31 days,You would recieve 1 billion 73 million 742 000 on january 31st.Congratulations you just become a billionaire in a month.

But if you delayed that game for a week and didn't start compounding that first dollar until january 8th,how much would you receive on janua ry 31st? 250 million? 100 million? nope.you would take home just 8 million dollars on january 1st.By waiting a week you brought home 99% less money.If this doesn't seem intuitive dont worry the human mind doesn't easily grasp the power of compounding.

Warren buffet is regarded as the best investor of all time.Today he's worth approximately 86 billion dollars,but did you know that nearly 82 billion of his 86 billion was generated after his 65th birthday.

Here's a chart of buffet's wealth over the years.since buffet was 11 years old,he has achieved an annual average  return of 22% which is twice as good as the average stock market return but this 22% average is nothing compared to other investors. 

Take jim siomons a mathematician who runs the firm renaissance technologies.simon's has achieved 66% returns for the last 33 years,but simon's has just a quater of the wealth that buffet has.Because simon's like other investors have not consistently compounded theiir wealth as consistently as buffet has.Buffet has more money than other investors because of one primary reason he's maximized his time in the market.

 To leverage the power of compounding the first key to buiding independence level wealth is to start investing now with whatever you can afford,may that be a 100 dollars or 10 thousand dollars and keep that money invested so you give compounding enough time to work its magic.This advice is simple but many smart investors fail to follow this advice because they get greedy.Many years ago charlie munger and warren buffet had another business partner named Rick Garen.Garen was an investing genius like Monger and Buffet but few people know bulgarian because when the stock market was soaring in the late 1960s garen leveraged money and used debt to maximize his returns.But when  the stock market dropped by 70% in early 1970s garen got margin calls and was forced to sell his stock.

Whenever I am tempted to take on risk and chase a big return in any given year I just remember that If I am wrong and loss 50% in one year,I need to achieve 100% return the following year just to break, even now if greed doesn't interrupt your compounding curve fear probably will when you watch your stock market portfolio drop by 30% in a market downturn.Fear will likely consume you and make you believe that you are going to lose all your money so you better sell and wait for the market to recover but know this in any 20-year period 100% people who bought and held the sp 500 stock market index made money.we all must develop the mental fortitude to wether short-term downterms in order to benefit from long-term uptrends and leverage the power of compounding, to do this we must correct the second money misunderstanding.

2.Volatility:-

Volatility refers to the daily swings in the market.Stocks have high volatility because on any given day a stock portfolio can be up or down a few percent.people who can't handle the emotional ups and downs of the stock market or other volatile markets invests in volatility assets like treasury bonds and  guaranteed investment contracts to achieve a steady return but no low volatality asset will out perform a volatile stock market.

over an extended period some investors believe that they can get high annual returns without volatility.Thats why several people happily gave millions of dollars to a man on wall street who claimed he could generate a steady 1% return each month with no down side risk.That man was bernie madoff a con man who ran a ponzi scheme and took everyones money.Volatality is the emotional price you need to pay if you want good annual returns.

If you're invested in an index like s&p 500 which constantly adds growing companiesto replace dying companies.You can be confident that the long-term trajectory of that index is up and to the right regardless of how much volatility the index experiences in any given monh or year.But wnen you loginto your trading accout and you're down  a bunch of money for the day or month it's hard not to believe that you've done something wrong.

Author Morgan Housel offers a great analogy to help you ride out the market dipa and embrace volatility.House hold suggets viewing volatility as a fee no a fine.if you get a fine like a parking fine for parking in an illegal spot,You change your behavior and avoid that spot in the future.But if that parking spot require a fee upfront you would pay it and continue parking there,if that spot was the best spot.    For miles the same principle applies to investing.If you own an index like s&p 500 view the volatility and the occational dip as a feefor being in the market and getting the oppurtunity to receive high annual returns over an extended period of time.

3.Tail Investments:-

When amazon launched the fire phone in 2014.It could very well have been a dominant smart phone and doubled amazon's stock price.But the fire phone was a dud and just a few years after the fire phone was launched ceo jeff bezos had to scrap the project and swallow 170 million loss but bezos was unfazed in an interview after the fire from failure he said "If you think that's a big failure we are working on much bigger failures right now,I am not kidding some of them are going to make the fire phone look like a tiny little blip".

Bezos made 100's of small bets at amazon, one of those bets was amazon web services a small side project that now generates over 60% of mazon's operating income.Amazon web service is a tail investment,a single investment that massively performed all other investments and made up for several bad investments like the fire phone.Since its impossible to know which investments will generate huge returns and which will not,its wise to spread out your bets instead of going all in one investment.Make atleast 10 equal investments in a diversified group of companies,currencies,commodities or other assets you think could double in the next five years or invest in a big broad index of companies like the russell 3000.

Since 1980 nearly 50% of companies in the russell 3000 have lost value but the index had provided a 73-fold return,thanks to just 7% of companies in the index like apple and amazon who have done extraordinarily well as author morgan housell likes to say "you can be wrong have the time and still make a fortune".

Conclusion:

In the end strengthen your investing psychology by constantly remainding yourself to leverage the power of compounding embrace volatility and make many diversified investments to benefit from a few tail investments.Remember buffets compounding curve and invest right now to make time your biggest competitive advantage.Remember that volatilty is a fee not a fine and remember that you can have several failed investments like the fire phone .so long as you have one or two widly successful investments like AWS.That was the core message that I gathered from the psychology of money by Morgan Housel.This is one of the best books I've read for Months and a must read for any aspiring investor.I highly recommend it

                                                                       FAQ

1.Does these methods really worth and will it work really?

Ans:-Yes, You can try these methods 100%, these are worth to tackle the financial deeds.

2.Can we apply all methods at a time?

Ans:-Yes,You can apply all methods at a time.