The Geometry of Wealth

Text in black are quotes; text in green are my notes. I sometimes write in Spanish.

• Being rich is having “more.” The push for more is a treadmill on which satisfaction is typically fleeting. The quest to be rich usually doesn’t end where many of its sojourners think it will. Wealth, by contrast, is funded contentment. It is the ability to underwrite a meaningful life—however one chooses to define that. #

• No matter the lifestyle, accent, politics, or favorite sports team, everyone I meet wants to take care of their families, remain or get healthy, be generous to others, enjoy their hobbies, and excel at work. #

• If anything, money alleviates sadness more than it inspires joy. #

• Crosby suggests three major reasons that we loathe talking about money: It’s stressful, it’s socially taboo, and most of us are uneasy with numbers. He cites a 2004 American Psychological Association survey showing that 73% of Americans say money is the most stressful factor in life. It is more stressful than death, politics, or religion. #

• We don’t sprint to Target when they mark up all of their merchandise and avoid the mall when everything goes on sale. But that’s exactly how the investment community in aggregate acts. #

• Only a small portion of our contentment in life—about 10%—is determined by life’s circumstances. Ponder the gravity of that insight for a moment. The attributes many of us often use to define ourselves are only incidental to living well. Whether you live on a country estate or in a one-bedroom flat; whether you have perfect features or are a strong candidate for plastic surgery; whether you enjoy family bliss or endured nasty divorce; whether you are at the top of your class or are an unrepentant slacker. These and countless other examples have only a slight impact on our lifelong happiness. #

• In life, we begin just once, but we begin again countless times. Resilience is where many great things are born. Adaptation recognizes the need to respond to life’s events, including those which are unforeseen and unwanted. To use Wilson’s felicitous phrase, it is “changing the stories we live by.” #

• “Wherever you fly, you’ll be best of the best. Wherever you go, you will top all the rest. Except when you don’t. Because, sometimes, you won’t. You’ll get mixed up, of course, as you already know. You’ll get mixed up with many strange birds as you go. So be sure when you step. Step with care and great tact and remember that Life’s a Great Balancing Act. Just never forget to be dexterous and deft. And never mix up your right foot with your left.” Seuss’ deceptively elementary book lays bare in just 340 words life’s journey of ups and downs, decisions good and bad. #

• While happiness (what I refer to as experienced happiness) comes and goes with daily pleasures, the achievement of joy (reflective happiness) takes work. #

• But work means something more than a pay check. What we “do” in life is a deep source of meaning. It defines us. (What’s the first question you usually get asked when meeting a stranger?) Being good at something you care about is one of life’s most profound sources of fulfilment. When we can exercise our craft, excel at it, and see that it has a positive impact on the world around us, it feels good. #

• Work doesn’t become meaningful without some sense of struggle, without genuine effort. #

• Money is more effective at diminishing sadness than increasing happiness. #

• In particular, there is emerging evidence that a higher income may have more of an impact on lessening sadness than increasing happiness. #

• Happiness follows a serpentine path through our money lives. Having more money can buy daily happiness, but only so much and for only so long. The hedonic treadmill is unavoidable. Equally if not more profound, having more money can alleviate the pain and distraction of sadness. That’s valuable in both the obvious sense, but also in that by sidestepping misfortune we preserve the mental energy to engage in more contemplative pursuits. #

• What drove Pascal, just like it does us, is what modern behaviorists call “loss aversion.” This is the simple but powerful idea that the pain of losses is greater than the pleasure of gains. We are wired this way: Our brains emphasize avoiding losses over achieving gains. #

• Loss aversion has no “off” switch. It’s always on, animating one of life’s endless tensions. We want great things, but the disproportionate impact of losses holds us back. We are both aspirational and scared, greedy and fearful. We like risk, we just don’t like losses. Broadly speaking, in life successfully managing the daily balance between risk seeking and risk aversion is the first key to wealth. #

• Taking more risk does not produce greater returns. Instead, taking more risk increases the variability of future outcomes. That’s not great bumper sticker material. Nevertheless, if there were a reliable relationship between more risk and bigger rewards, then technically you wouldn’t be taking more risk. Everyone would bet long shots all the time. #

• Not losing is the first step toward winning. #

• In tennis, like investing, professionals strive to be more right, while most others should focus on being less wrong. #

• “People may believe that who they are today is pretty much who they will be tomorrow, despite the fact that it isn’t who they were yesterday.” #

• But overly specific long-term plans can cause problems, too. How sure are we that in a decade or two we will want that vacation home in Florida, that boat, or that high-rise apartment in the city? As I’ve pointed out, we’re pretty poor at predicting what we want in the future. We assume that what we prefer now is what we’ll prefer far down the road, that our values will go unchanged—and that life’s unpredictable events won’t upend our assumptions. #

• First, we prioritize being “less wrong” over being “more right.” Managing risk is a priority over enhancing returns. This risk-first mindset flies in the face of most elements of the modern money culture. It also happens to be the hallmark of history’s greatest investors. It is how we protect ourselves and stay in the game. #

• Second, we immunize our liabilities before we maximize our assets. Much of financial advice remains focused on choosing great investments or even “beating the market.” Instead, our priority is taking care of obligations—no matter how hard they are to define, especially far in the future. #

• Finally, successful investing starts by looking in the mirror. It is undermined by looking out the window or by staring at financial television. The vagaries of psychology trump the precisions of finance over time. #

• For investing purposes, what something does is more important than what it is. An official definition of an asset class, as cited above, is a group of securities that exhibit similar characteristics and behave similarly, but witness how even a formal definition conflates attribute and function. Sometimes things that look the same don’t behave the same. Conversely, different-looking investments can behave similarly. #

• Striving for decent outcomes is as good and honest an effort as we can make. It’s also the easier path. Our mental energy is limited. Adaptive simplicity’s tank can run to empty, at which point complexity and impulsiveness are more likely to wreak havoc. #

• There are four—and only four—quantitative elements that enlighten any potential investment.159 These are, to use the technical terms: Returns, volatility, correlation, and liquidity. #

• Remember, successful investing is based more on minimizing regret than maximizing gains. #

• The well-worn notion that taking more risk produces more return is inaccurate. Instead, taking more risk increases the range of potential outcomes: #

• Volatility is the “price of admission” for access to potential gains. #

• Investors have become conditioned to believe that they want to own a diversified portfolio, but they often don’t like the reality of diversification. Like vegetables, diversification sounds healthy but doesn’t always taste good. With true diversification, there will always be something in your portfolio that stinks. #

• Money will always inform our sense of self-worth and place in the world. Having more—especially more than others—is psychologically meaningful. To think otherwise would be naïve. #

• One tack for realizing the upside of managed anticipation is to pay now but consume later.195 There’s something stodgy-sounding about the “layaway” plans of yesteryear, but that pay now/consume later is a better recipe for happiness than the consume now/pay later regime of the modern credit card. #

• True wealth is funded contentment. Anyone with the right mindset and the right plan can afford a meaningful life. #

• Does money buy happiness? The answer to this timeless question hinges on the distinction between being rich and being wealthy. One is the quest for more money, the other is funded contentment. #

• money is more effective at alleviating sadness than priming happiness, which explains why the rich might be less sad but not happier than others. #