I spent MY COLLEGE years working as a valet at a nice hotel in Los Angeles. One frequent guest was a technology executive. He was a genius, having designed and patented a key component in Wi-Fi routers in his 20s. He had started and sold several companies. He was wildly successful.
One day he handed one of my colleagues several thousand dollars of cash and said, “Go to the jewelry store down the street and get me a few $1,000 gold coins.” An hour later, gold coins in hand, the tech executive and his buddies gathered around by a dock overlooking the Pacific Ocean. They then proceeded to throw the coins into the sea, skipping them like rocks, cackling as they argued whose went furthest. Just for fun. Days later he shattered a lamp in the hotel’s restaurant. A manager told him it was a $500 lamp and he’d have to replace it.
My favorite Wikipedia entry begins: “Ronald James Read was an American philanthropist, investor, janitor, and gas station attendant.” Ronald Read was born in rural Vermont. He was the first person in his family to graduate high school, made all the more impressive by the fact that he hitchhiked to campus each day.
Read died in 2014, age 92. Which is when the humble rural janitor made international headlines.
2,813,503 Americans died in 2014. Fewer than 4,000 of them had a net worth of over $8 million when they passed away. Ronald Read was one of them
In his will the former janitor left $2 million to his stepkids and more than $6 million to his local hospital and library.
Those who knew Read were baffled. Where did he get all that money?
In 2018, I wrote a report outlining 20 of the most important flaws, biases, and causes of bad behavior I’ve seen affect people when dealing with money. It was called The Psychology of Money, and over one million people have read it. This book is a deeper dive into the topic. Some short passages from the report appear unaltered in this book.
1. No One’s Crazy
Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.
LET ME TELL you about a problem. It might make you feel better about what you do with your money, and less judgmental about what other people do with theirs.
People do some crazy things with money. But no one is crazy.
Here’s the thing: People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons.
The Australian who hasn’t seen a recession in 30 years has experienced something no American ever has.
On and on. The list of experiences is endless.
You know stuff about money that I don’t, and vice versa. You go through life with different beliefs, goals, and forecasts, than I do. That’s not because one of us is smarter than the other, or has better information. It’s because we’ve had different lives shaped by different and equally persuasive experiences.
I have no first-hand knowledge of the Depression. My family had one of the great fortunes of the world and it was worth more than ever then. We had bigger houses, more servants, we traveled more. About the only thing that I saw directly was when my father hired some extra gardeners just to give them a job so they could eat. I really did not learn about the Depression until I read about it at Harvard.
Or inflation. If you were born in 1960s America, inflation during your teens and 20s—your young, impressionable years when you’re developing a base of knowledge about how the economy works—sent prices up more than threefold. That’s a lot. You remember gas lines and getting paychecks that stretched noticeably less far than the ones before them. But if you were born in 1990, inflation has been so low for your whole life that it’s probably never crossed your mind.
What inflation did to prices in your teens and 20s —Born 1960 —Born 1990
America’s nationwide unemployment in November 2009 was around 10%. But the unemployment rate for African American males age 16 to 19 without a high school diploma was 49%. For Caucasian females over age 45 with a college degree, it was 4%.
Local stock markets in Germany and Japan were wiped out during World War II. Entire regions were bombed out. At the end of the war German farms only produced enough food to provide the country’s citizens with 1,000 calories a day. Compare that to the U.S., where the stock market more than doubled from 1941 through the end of 1945, and the economy was the strongest it had been in almost two decades.
The idea of working in a “sweat shop” compared to that old lifestyle is an improvement, in my opinion. I know that my aunt would rather be “exploited” by an evil capitalist boss for a couple of dollars than have her body be exploited by several men for pennies.
That is why I am upset by many Americans’ thinking. We do not have the same opportunities as the West. Our governmental infrastructure is different. The country is different. Yes, factory is hard labor. Could it be better? Yes, but only when you compare such to American jobs.
We live paycheck-to-paycheck and saving seems out of reach. Our prospects for much higher wages seem out of reach. We can’t afford nice vacations, new cars, health insurance, or homes in safe neighborhoods. We can’t put our kids through college without crippling debt. Much of the stuff you people who read finance books either have now, or have a good chance of getting, we don’t. Buying a lottery ticket is the only time in our lives we can hold a tangible dream of getting the good stuff that you already have and take for granted. We are paying for a dream, and you may not understand that because you are already living a dream. That’s why we buy more tickets than you do.
Social Security aimed to change this. But its initial benefits were nothing close to a proper pension. When Ida May Fuller cashed the first Social Security check in 1940, it was for $22.54, or $416 adjusted for inflation. It was not until the 1980s that the average Social Security check for retirees exceeded $1,000 a month adjusted for inflation. More than a quarter of Americans over age 65 were classified by the Census Bureau as living in poverty until the late 1960s.
There is a widespread belief along the lines of, “everyone used to have a private pension.” But this is wildly exaggerated. The Employee Benefit Research Institute explains: “Only a quarter of those age 65 or older had pension income in 1975.” Among that lucky minority, only 15% of household income came from a pension.
2. Luck & Risk
Nothing is as good or as bad as it seems.
LUCK AND RISK are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort.
NYU professor Scott Galloway has a related idea that is so important to remember when judging success—both your own and others’: “Nothing is as good or as bad as it seems.”
In 1968 there were roughly 303 million high-school-age people in the world, according to the UN.
About 18 million of them lived in the United States.
About 270,000 of them lived in Washington state. A little over 100,000 of them lived in the Seattle area.
And only about 300 of them attended Lakeside School.
Start with 303 million, end with 300.
Gates is not shy about what this meant. “If there had been no Lakeside, there would have been no Microsoft,” he told the school’s graduating class in 2005.
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