Behavioral Finance: Why People Are Bad With Money But You Don't Have To Be | Greg Vanderford | Skillshare

Behavioral Finance: Why People Are Bad With Money But You Don't Have To Be

Greg Vanderford, Knowledge is Power!

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16 Lessons (1h 41m)
    • 1. Behavioral Finance Promo

    • 2. Lesson 1 Psychology of Money Intro

    • 3. Lesson 2 Why You Should Invest Conservatively

    • 4. Lesson 3 Be Greedy When Others Are Fearful and Fearful When Others Are Greedy

    • 5. Lesson 4 How to Outperform Most Professionals

    • 6. Lesson 5 Mr Market

    • 7. Lesson 6 Why You Should Never Be Fully Invested

    • 8. Lesson 7 The Power of Delayed Gratification

    • 9. Lesson 8 The Destructive Power of Social Proof

    • 10. Lesson 9 Fear of Missing Out Tendency

    • 11. Lesson 10 Good Old Fashioned Greed

    • 12. Lesson 11 Choosing the Right Work

    • 13. Lesson 12 Be Careful Who You Associate With

    • 14. Lesson 13 Investing vs Speculating

    • 15. Lesson 14 Invest in Cash Producing Assets

    • 16. Lesson 15 Course Review


About This Class

BEHAVIORAL FINANCE is a relatively new area of study. 

Blending together psychology and finance, this subject came about as professors and practitioners of both professions found themselves faced with an inescapable truth:


Not only are people emotional about money, but this emotion and the misjudgement that it causes has a huge negative affect on the average person's finances.

Understanding the Psychology of Human Misjudgement, made popular by Warren Buffett's right hand man Charlie Munger, will help you to make better financial decisions, be a better investor, and help you build wealth much faster.

In this course you will learn:

1. Why people are bad with money and you don't have to be

2. How to be a better investor

3. How to make rational financial decisions

4. How to build wealth steadily over time with low risk

5. How to overcome common psychological errors that lead to bad financial decisions

6. Much more

Join the course and use your new understanding of Behavioral Finance to make better investing decisions and build more wealth faster than anyone that does not understand these fundamentals principles!


1. Behavioral Finance Promo: I'm a big banner for and I have been a student of finance and an investor for a very long time now, and one area of finance that is relatively new and it's still developing, but it is a very important area of finance is called behavioral finance What it is. It is the way that money and emotions relate to each other specifically how human beings tend to make really bad financial decisions based on the way their brains work, based on the way that we evolved and the way that we're wired were actually predisposed to being bad with money. And so in this course, we're gonna look at why that is analyzed, how we can make better decisions when it comes to money and bill well over time with virtual certainty. So this is a course about psychology. It's about investing, and it's about how human behavior intersects with the two so that we can make more rational decisions and just improve how we deal with money and finance. So I hope you guys join the course and get a lot out of it, and I will see you inside 2. Lesson 1 Psychology of Money Intro: Welcome to the course. Behavioral finance. Why people are bad with money. But you don't have to be this course of all up to my first course on behavioral finance, the psychology of misjudgments, and I got a really good response from that class. People are really interested in this topic. It's a very interesting topic, and it's kind of a new area of finance that professors and researchers are really just starting to understand and go deeply into. And it's very useful for us to understand why people are bad with money and the common mistakes that we make when it comes to managing our money saving. And, of course, in best basically behavioral finance, the new area of study It came about by people like Charlie Munger and War Buff it getting extraordinary results in stock market and people looking at the results of wondering, How is it that they're able to up for other people on the stock market by so much? And a lot of the reason for their success wasn't because of the super high i Q. Although they're obviously very intelligent, itwas understanding certain psychological factors that tend to lead the bad investing decisions by most people and how we can avoid those of steaks. So it's really about avoiding mistakes and avoiding bad judgment, more so than it is about being brilliant and warm Love and Charlie Munger constantly talking about this. People ask them for investing advice and how to be successful. The stock market a lot of it is just not making stupid mistakes and understanding how human psychology, due to the way we evolved and different environment, actually hurts us when it comes with thinking about investing our money. We have a cognitive bias has left over from earlier times in our evolution with certain behaviors were beneficial to us. But now these behaviors that causes problems when it comes to making decisions in the modern world. And so by understanding these cognitive biases, we could make better financial decisions. We can avoid large financial on other types of mistakes in life and become wealthier and more successful. Most people I don't understand. These things have never heard this before, and so there's gonna be really beneficial for you if you're one of those people. That's all totally new to you, especially here. Someone who knows a bit about finance and investing. Looking at it from this angle, understanding that deep psychological nature of our relationship with money. It's very emotional, you know, will help you a lot when it comes to making your decision. So Hagel finding to relate to all forms of decision making, not just finance, so it makes it applicable to virtually every area of life outside the role. Science and understanding the human tendencies can help us to avoid other problems like genocide, market crashes, destructive relationships and just generally improve human life. So in this course, you learn how to apply these tendencies to your life in order to get more healthy and be more healthy, wealthy and wise, as Benjamin Franklin put it. But over the course of the next several lectures, we're gonna learn why people tend to make bad financial decisions and what we can do about it. And the next lesson we're gonna jump right in, or to look at how. It's just like a lot of proven that human beings send a feel loss about twice as acutely as the goodness that we feel when we gain, and this has deep implications for how we handle money and how we save and invest. So that's we're gonna look at 3. Lesson 2 Why You Should Invest Conservatively: Basically we have learned that we feel lost as much more acutely as we feel things that we gain. So when you lose money gambling, there's this really stronger is try to win it back. And when you do in the back and then you make a profit, you actually don't feel that good. You just don't feel bad anymore for having lost something. This is a very profound. It has deep implications for how we behave when it comes to money. So in other words, instead of chasing gains, we should seek to avoid losses. And that will lead to more peace of mind as we invest our money and will also obviously just naturally lead to more success. So instead of trying to make a lot of money and chasing returns, and let's say the stock market or in real estate by being conservative and trying to avoid losing money will probably end up doing very well. So as Charlie Munger has said, being conservative and not expecting miracles is the way to go. Very simple and sort of a common sense approach, but it's what most people don't do, and so we have to look at some of this basic stuff and try to understand. Why is it that even though it's so easy to understand what you are being told, actually behave this way in order to achieve a certain outcome is often best to look at how to avoid the undesirable outcome. This is called inverting is something that mathematicians do in order to solve the problem . It's often best to convert the problem and look at it backwards and again. This is something that Charlie Munger is always talking about. If you want to be happy, maybe you should look at the things in life that make you unhappy. So he says that you know that because of that, we can avoid drugs not holding, avoid addiction. We can avoid all these other bad behaviors and simply by avoiding bad things, we're gonna be left with what is good. So we can apply that same logic to how we handle investing and money. So example would be, you know, investing with virtually guaranteed or high probability of an adequate return like se 7%. That's much better than trying to take more risk and hoping for a larger return, Let's say, 20% trying to get rich faster and then not only end up actually losing money because you pushed your mind too hard. But then also feeling twice as bad about the loss, right? So when you're trying to make money too quickly and when you are not satisfied with adequate result woman, actually, over time, we'll make it financially independent. If you look at compound interest tables is we're gonna dio one point later in the course, you'll see that investing money, even relatively small sums at consistent 7% over many years will make you quite wealthy. But a lot of us we wanted to make it faster, greedy. You know, you make this mistake of trying to chase returns and when the easiest thing to dio would be simply Teoh except the little return a higher probability of that return and basically get a guaranteed result and at least avoid the pain of losing our money. Because, of course, money is very emotional. That's the whole point of understanding behavioral finance. We're realizing that human beings, that's very deeply emotional connection to money, and it causes all kinds of bad behavior and bad decision making. Another thing that's important to understand is that you know it takes a 2% gain in your assets of appreciating your assets to make out for a 1% loss. Because you know your assets after they've lost 1% they have shrunk from the original amount. So now, in order to gain that 1% that you lost, you gotta compound your money at a higher rate. Still, I wrong here, let's fix that. And so it hurts to lose money. So let's try to avoid was going in the first place. And if you avoid losing money, you don't need to compound your money at a higher rate. You can accept adequate results, and your capital will simply grow and grow over time. That's why weren't up in his company, Berkshire Hathaway. When you look at their investing results, sometimes during like boom years during big long streets where it actually underperformed the market, like in the 19 nineties during the dot com era, they still end up with much, much higher pump and return, because when the markets crash, they tend to outperform the market by huge amounts during the crash is because they have so much cash on hand because they didn't invest in all those risky assets that by basically avoiding losses, they end up with a far, far superior, long term compound return. So it's a really important thing to understand that when you lose money, it takes a long time in a lot of effort and maybe more capital to get back what you've lost . But you simply avoid losing money and invest conservatively. Then you end up getting much, much richer over time. And that's why one of things that weren't about that says his rule number one is Don't lose money. Well, number two is Don't forget Rule over one, yet another very basic common sense thing to say understand? And yet something that will help us if we actually knocked it out in the real World game Next lecture. We're gonna look at this whole idea of being greedy when others are fearful and fearful when others agree. It goes against our natural tendency to buy assets when their prices are low, because we're afraid and to sell assets when the prices are high, because we want them to keep going higher and it seems like they're gonna ever for ever gonna go up but this is actually the opposite of how we should be thinking and behaving, so we look at the reasons for their next list. 4. Lesson 3 Be Greedy When Others Are Fearful and Fearful When Others Are Greedy: So this idea to be greedy when others are fearful and fearful when others are greedy basically just means that when people are terrified and markets are crashing, that's actually time. You should be buying because prices stocks are going down and the officers also shoot the dot com before the dot com bubble burst in the late nineties. That would be the best time selling getting rid of all your highly priced assets. But people have this big fear of missing out, which is actually another lesson. We're gonna look at that fear of missing out. They didn't want to miss out on the gains that they could have gotten if they, uh, market kept going up. And so, you know, is this idea that everybody pretty much knows, buy low and sell high? Only one thing that maybe a lot of people don't realize is that very, very few people actually do this. Most people don't do this because buying low when markets are nose diving. It's one of the hardest things have you psychologically cause has martyrs, but down we fear they're going to keep going down. We're going to go up. We fear they're gonna keep going up, and this is something that has to do with human psychology and also the nature of the way our brains were constantly seeking patterns. And so we follow trends. We see a trend going one direction, our mind automatically postulates that is going to keep going in that direction, even if that's not logical. So understanding that stocks and other investments, like real estate or whatever, they're more like groceries. You should buy them when prices go down, not up. But that's not what we do. Because of our emotional connection to money, we tend to do the opposite thing. The professional financial community has actually made investing very confusing the way they talk about all different things that make it very complicated. But it's actually very simple. Don't over pay for assets. You should be trying to find an asset that you can value, and you should be looking at the value and you calculate what you're gonna talk about more later and then actually get real value for your mind's not that complicated. But professional investors have made a complicated that made it seem confusing on purpose, so the course they can sell you advice and sell you products and things like that in general, the best time to buy any half set with not real estate or stock market or whatever is the markets crashed. The best undersell is the markets are in a bubble and prices are high. It's a simple as that, but it's not an easy thing to do. So Warren Buffett He has said that you should have an I Q of at least 125 time to manage your own investments. Otherwise, you should just invest in a little cost in next month. So you're saying that, you know, it just takes a bit of intelligence, but thank you. Want to find out a little bit above average? It's not like it to be a genius, but what he also said, The next thing is even more important that you too much above 1 25 like you. You'll actually hurt you because intelligent people tend to overestimate their intel. So, for example, a doctor or lawyer who thinks they're very intelligent because their expert in one thing they're gonna naturally assume in many cases that they're also gonna be good investing understands that of subject with It's not the case at all, and so the end of being a very bad investing. It turns out that people that are very intelligent but haven't been trained in this area, they tend to do the worst when it comes to investing. Their money is also a reason why doctors and lawyers and other professionals are targets for scam artists and con artists and stuff because they have money. But then they're also overconfident. Or at least they tend to be overconfident, would approached by these types of scammers and stuff. So the lesson here is that investing is actually more about character than it is about intelligence, and that's a really, really important thing to understand. When you manage your own money, it's Ah, what you do and how you control your behavior is much more important than being super smart and understanding really complex financial instruments. Okay, And so with that, we're going to next take a look at how to outperform most professional money managers just by simply doing what Warren Buffett recommends and a couple little tips here and you. Actually, statistically will be able. Teoh outperform 90% of money managers 5. Lesson 4 How to Outperform Most Professionals: So the first thing is, if you don't really like investing or you don't have a ton of time to spend studying companies and investment in nearly that Warren Buffett recommends, 90% of investors should simply invest in a low cost index fund like the S and P 500 give you to take a simple later. Less is it's SP. Why that's one of them. Also, Vanguard has. It's moments like that. You pay low fees, it's passive. You don't do anything that you will get average results. So you gotta pay lower fees and taxes. Not gonna be worrying about a decisions or really worried about anything, as we know from statistics that over the long term the average result of the market is around 9%. You compound your money and 9% over 2030 years, you can get very, very wealthy, and we're gonna look at some numbers later. This course is going to be some examples of how even his little, you know, $500 look saved up over time, compounding at 9% and make you very rich. Depending on the time phrase, you basically guaranteed to get average results. And as hard as it is for some people to believe you're actually going out. For most hedge fund managers and professionals who are constant trying out born market, they're getting a huge sums of money out for the market. But they're also reflecting a huge amount of fees, and the customers are in curing a lot of taxes because every time they sell an asset that debate taxes on them. So simply by being passive, being more inactive and leaving your money invested in index fund, you're going to outperform most special money manage. This is starting to become very well known now as Warren Buffett is constantly out on the airwaves talking about this. But it's a good thing for you to understand and for me to repeat, and basically by not freaking out when the market is volatile and prices are going up and down, you end up outperforming most professional money managers that are really active trying to up on the market. Like I said, it's really difficult to predict what's going to happen in the market. Anyone who tells you that they can predict the market is lying with fooling themselves if someone like Warren Buffet in his apartment. Charlie Munger cannot predict. The markets he's got are geniuses that got 60 or 70 years. They're in their late eighties and nineties. Actually, they have that much experience and they say the markets unpredictable. We should listen to them basically but being passed in. You leave your money in the market and you let those companies that you've invested in earn money for you. And over time, the market will value that investment rationally in the short term, and long term prices will swing wild. But over time the market, as we say it's, Ah, away machine, short terms of voting machine. But in the long term, it's a weighing machine, so the market is not totally efficient, but it's mostly efficient. So being passive rather than active will make you more money over time. And there's something this idea of Mr Market. The market has a certain personality that is sometimes very irrational, and the prices are way lower than they should be like after the Great Depression and was very afraid after that crash. So there was bargains and then again, 19 nineties, you had a shoot bubble when the Internet was new and all these Balcom coming for new. You know, they weren't making any money. They were selling for astronomical prices because everyone thought this time it's different and growth will go on forever. Course we know that's not true. So the market could be very irrational. And this is an idea introduced by Benjamin Graham, who was warned up his mentor. And he was a very accomplished investor in his own right was a really good teacher of finance. And it's a way for ordinary people understand how the stock market works. The market is not perfectly efficient, like the teaching visit school, the efficient market hypothesis. Teachers at the market take all available information into account, and it's therefore deficient. But of course, of this were true. We would never have booms and busts. We would never have crashes, would never have bubbles. So obviously the market is not completely efficient, it has inefficiencies, and good investors could take advantage of inefficiencies by buying when stocks are really cheap and selling when stops are really high, or simply holding for a really long time and allowing the compound ing to take care of itself. So the next lesson we're gonna delve a little more deeply into understanding this Mr Market concept, how could help us as invested 6. Lesson 5 Mr Market: so they did. Mr Market is that, you know, every day you get an offer for your stocks to be bought at a certain price. Some days, Mr Market offers a fair price, markets being pretty efficient. Other days, he office prices that are far too low or prices that are unreasonably high. Now most people freak out about this because they think of the market as something that is telling you the actual value of your assets. And so if the price is going way down, we think we're losing money. But we're not losing money. We don't sell right. You build stocks and the value goes down and you just hold them. And then later on, the price is being offered to you. But Mr Market goes back up, and that continues to go back up. You haven't lost any money, but most will do if they get afraid. They feel like they're losing money because the price quote when the market is low, they tend to sell their stocks, but they're afraid of losing more money and then for us to end up with a bad result, we need to be able to do the opposite. The same thing happens when prices go really high. Sometimes people will actually sell when the market is going up, but they should just hold on to their stocks, not even worry too much about the price. Quote from market and just let your money stay in there and compound. The volatility of the market is very psychologically difficult for human beings. Handle. This is why people like Warren Buffett and Charlie Munger and others who understand the nature of the market and have the discipline to basically ignore the daily price fluctuations are going to end up doing very, very well. And the whole idea here is understand that it's the long term that matters because when you invest in the stock, you're investing in actual business and the profits of that business are going to be way to accurately. Over time, the market is going to fluctuate based on news based on pessimism based on maybe wars that are going on at all kinds of external events. But over time, as we said, it's the market. It's a weighing machine. Over time, it will value your asset based on how much profits are produced. That's a key thing to understand so that the daily fluctuations and price quotes that Mr Market offers you are really irrelevant. That something that is not taught in business school. That Benjamin Graham in the 19 thirties. He introduced this idea after having you know, a couple of decades of experience himself with the market and actually suffering through the 1929 crash. He came to understand the nature of the market, and then the rest of days, it really helped him out. So basically, the market give us give us a gift of having the choice toe only by when we want to, when prices are low, weakened by. But prices are highly in cell and otherwise, we're basically ignore what the market is telling us. Just don't pay that much attention to it now. That sounds like it's easier said than done, but it's a habit that can be cultivated. And, of course, good investors. They do just that. So most of the time you can simply ignore Mr Market has warned, Weapon himself says. He said, You don't need to swing at every pitch. You can wait for little crisis before buying an asset is a big advantage for us if you're a baseball player, is the baseball analogy. You only get a few pitches if you swing it three pitches and strike out her out. But in investing, you can sit there and wait and wait and wait until really good investment comes along. And then, of course, you have to have cash available. We call that dry powder in the business to take advantage of those low prices. And so we went to look more at that throughout the course as well. According to Phil Fisher wrote a famous book called Common Stocks and Uncommon Profits. It's also someone that a Munger and Buffett talked about a lot. Most people over fear losing value to inflation. So the reason talking about this is that I just said that if you have cash ready to invest in the market was down, then you get really good prices and make a lot of money. But most people, they fear holding too much cash and not being fully invested because they worry about inflation. This is something that business gurus and teachers are always talking about. If you're not invested, your mind just sitting there in cash, you're losing one or 2% value over time because every year, if inflation is 2% on average per year and your cash is just sitting there under the mattress, for example, you are losing value. But the thing is, this is a over fear. We shouldn't invest our money in overpriced assets and then lose it or have a high probability of losing it. Just because we worry about inflation is better to have a little bit of inflation go on. It was a little bit of value 12% on your money over the course of one year or even two years, and then all of a sudden had a huge opportunity come your way and invested. Very, very Advent changes prices, holding cash and waiting for little prices is better than always being fully invest, no matter how high the market is. That's why Warren Buffett, Charlie Munger. During the 1990 boom, when all the tech companies were going through the roof in price, they was letting the cash pile up, and then when the crash happened, they started buying companies at discount prices is the same thing. In 8 4009 they were one of the few companies that had cash available to buy all of these extremely discounted assets. And so this is something that has to do again with patients and discipline. It's not rocket science. You don't need to be ingenious, too. Old money and let it build up in prices of the market are high, but it does take discipline. So we're gonna talk more about this guy is such an important concept that most people don't appreciate. You don't need to always be fully. 7. Lesson 6 Why You Should Never Be Fully Invested: so it's really important. Understand that you do not need to always be fully invested. Those people fear the stock market because they have all their money in there. And then when inevitably crashes as every once in a while, it will do it cause a lot of pain and suffering. There's no need to have all of your money in the market all the time. In fact, that's the market goes up as the prices go up. The intelligent investor should be buying fewer stocks, and we let in cash accumulators. You want to be buying a lower prices. This is the opposite of what most people do because they fear that as stocks more and more expensive or real estate or whatever, ask that we're talking about that they're going to lose out on the opportunity to buy and to get back into the market. But as we know from history, prices will not rise, and definitely there will be a crash. There will be a downturn, and as the market goes down, the intelligent investors should be buying more stocks at ever cheaper prices and let their cash reserves decrease. So this big fear that holding cash is going to be losing out because of inflation is a big over fear that is losing people. A lot of money holding cash for one or two years is no big deal is much, much better to do that and not lose a whole bunch of your network, then to be afraid of 1% loss or 2% lost due to inflation and then buying prices are high and then losing 30 or 40% of your assets. With the market crashes, the intelligent investor will be buying with the market crashes, and they will have cash available as we'll see some examples later. When Warren Buffett, Charlie Munger how they behaved during the dot com crash as well as the Crash 8009. They had a lot of dry powder, as we say available, and they were in hog heaven. It was just buying all the assets. A huge discount prices so but a lot of skill need of this behavior is patience and discipline. It is not a high i Q. But always keeping, say 10 to 30% of your assets are so in cash. You can sleep well at night knowing that you're safe, no matter what the market does. So always having in large caches air put you in a position to take advantage of bargains when the markets do craft. So you're getting to benefits. Here you are seeking well at night, knowing that you have a large portion of your assets out of the market. So if they crash, you're not losing money. But then, while everyone else is losing money and has no cash to invest, then when markets crashed, you buy assets at a big discount. See of cash reserves should go up as prices go up and you buy less and your cash reserves should go down as the market goes down, You blind more. This is the exact opposite of what most people do. It kind of goes against human psychology, but this is the way to be successful investor in the long run, and this is where all the really big money has been made. As I said before, Warren Buffett says, in order to shoot faster, the elephants need to keep a loaded gun. He's alluding to this idea that you need to have money at the ready, so that if an opportunity all of a sudden presents itself where maybe even an individual company stock crashes because of bad news or some scandal. And it goes to an irrationally low price you can buy up of shares father cheap and then before they go back up, so you need to keep your money ready to have a loaded gun, as he says so. An example of this is that during the two dozen two dozen nine crash Warren Buffett, he bought the entire Burlington Northern Santa Fe railroad a huge discount what it had been selling for just a year or two before, and he tripled his money within just a couple of years, tripled his money. So imagine that you had $100,000 to invest. You've been saving up and the market seemed expected. All of a sudden, it's a crash, and you see all these bargain stocks or even real estate, real estate crash as well. And all of a sudden you could buy, you know, two houses for the price of one. And so you go in there and you acquire these assets, and within a few short years you've got triple the money that you had or imagine if you did that with half a $1,000,000. You triple your money. Well, you're financially independent within just a few years. This is the way it's done. And it doesn't take a brain surgeon level intelligence. It does take this skill, be ableto wait and to watch. Of course, we're not interested in this and you don't know how to do it. You don't want to do it. Then all you need to do is what Warren Buffett recommends, which is by Will Cost Index fund, Let your money from town and 9%. It's also a good ideal. Another example is what Charlie Munger did during the same crash in 2000 and nine. He put tens of millions of dollars that he happened to have lying around in one of his companies. I think was the Daily Journal, which is a newspaper legal newspaper that they own in California. A tube, all that cash, and he bought actually the very same day that the banks bottomed out, doesn't I? He realized that they were probably going to get, um, tarp funds get bailed out by the government, and they were trading and only one or two times earnings, which is just an unbelievably low price for a profit producing asset or released of these banks that almost for certain ones they emerged from the crisis would be producing a lot of profits and growing again. It's a very, very, very cheap price. So we put tens of billions of dollars in these banks, and then he made five or six times money within just a couple of years when everything went back to normal and the reason they were able to do that, it's simply because they had cash available, whereas most people didn't have cash available. Also did the fact that almost everyone else is fully invested. They were desperate for cash. They were desperate for money. So Warren Buffett, you went around and you got all these amazing deals. He loaned money at Amazing rates of Return, and he just made it killing up of it. And it wasn't because he's a genius, although he is that it's because he understands nature of markets and the best 100 by is when assets are depressed. And in order to do that, you have to have cash on hands. The really important lesson for us laypeople to understand we don't have to be rich like Warren Buffett to take advantage of this. You in cash with a real estate bubble popped in 2000 and eight, you could get two or three houses for the price of one from previous prices from a year before You could pay cash for houses after that bubble popped. But of course, most people were fully invested because they were worried about prices going up and up, and no one had money to invest. This is a great lesson for us to learn, and the next thing I'm going to turn our attention to is the power of delayed gratification seems to be a lost art. But by understanding how to apply the delayed gratification, Teoh are Spanish. Er's into money. In general, we can basically guarantee ourselves financial independence within not that long of a time frame. 8. Lesson 7 The Power of Delayed Gratification : most people are simply not disciplined enough to forgo pleasure now for the ability to Ford far more pleasure in the future by investing their money instead of spending it. We overspend, especially us. Americans were terribly guilty of doing this. We have lost this whole idea of delaying gratification. It works in exercise and dieting and health. It works in your career. When you studying, go to school for a long time and then later on you reap the benefits of a high salary, and it works even more so in investing, we save money. You may be sacrifice a little bit, but then you watch that money compound a compound compound exponentially over time, so assembly to helping the habit of the struggle and not spending money on unnecessary thing. A lot of our expenditures are the average person can become financially independent within only a few short years, so boring your expenditures. It does two different things. First, it makes you become used. You're spending less money to living off less money so you don't need as much level of you also will be able to reach financial independence more quickly. Instead of needing a couple $1,000,000 or whatever to be financially dependent. Maybe you need half that. Maybe you leave less than half of that because you learn how to be frugal. And then, of course, by also being frugal, it creates that surplus that you need for investing, which will make you healthier over time. So it's sort of a 12 punch. Learning had not spend money and then also living at best for surplus. This is the way to handle your money intelligently, and it simply has to do with delayed gratification by simply saving as little as $500 a month and investing that in low cost index fund. Like I mentioned before, we could just say the S and P 500. The ticker symbol for one of the funds is sq wide. And look that one up on the Internet. I use Yahoo Finance for most of my information needs. You would have $2.6 million after 40 years. Now 40 years seems like a long time, but it seems this is Onley investing $500 a month, and this is pretty much a guaranteed return. 9% is a long term average return of the stock market over a long period of time. So just five months enough and is waiting for a long time and up $2.6 million. That's a lot of money. If you go even only 30 years, you would have almost a $1,000,000 starting from scratch with zero money just starting to put away $500 a day. Excuse me. A month for 30 years, you have almost be a millionaire after 30 years. Now, you just increase that $2000 a month. You would have almost $2 million after 30 years and $5 million over $5 million if you waited 40 years. So if you started saving $1000 a month when you're 20 by the time you were 60 you would have $5 million. Now, that almost seems unbelievable because I don't know anyone who's done that. And you may not, either. $5 million is a lot of money to make this way by simply saving and investing over time. But if you understand the power of compound interest, you understand this example that I'm showing you right here, you should start saving money right now. it doesn't take anything other than soften it away into an index fund. And Lydia compounding the problem is, and the reason most beloved do it. It's because they don't want to have to wait for that future money. They can't delay their gratification, and they also can't stomach that gyrations of the market, constantly seeing the prices go up and down. It could make somebody sick that they look at their hard earned money, go down by 10% over the course of a month or two, which sometimes happens to your correction, and they feel like they're losing money. And in the cell. The best thing to do is simply just forget that you have money in their don't check it. Don't check the prices on a daily basis that Warren Buffett says to do so. Delayed gratification understand delayed gratification and having discipline to forego pleasure now pleasure. The future. This is at the heart of being good with money, and you simply have to find a way to do it on One of the reasons that most of us can't do it I find it very difficult is because of social proof and keeping up with Jones is when you're surrounded by people, we spend the money a certain way. You like to show off things that they own, everyone around them. It's very, very difficult to resist the temptation to do the same. And we now live in a very materialistic society where this is a rampant problem, and so we're gonna turn to this a social proof tendency next. 9. Lesson 8 The Destructive Power of Social Proof: psychological studies show that social proof is a very, very powerful psychological tendency. We see someone else with something of value. We automatically desire to have the same thing or at least 99% of us tend to do that. Whether or not we realize it. We have a subconscious bias towards wanting with other people. Have. This makes sense from an evolutionary one of you when we saw someone else with food and we wanted food? We need to figure out how to get that food we want. When we see others have, in other words, our society itself. It creates a strong desire for us to consume. You spend our hard earned money, of course, is going to hurt us. If our goal is to save and invest money and become wealthy over time, we need to not be spending our money. We need to be investing our money. So keeping up with the Joneses and having this idea of social proof, it really hurts us. So we need to learn how to you first will not care what others think of you, what they think about your car or how nice your houses on my street clothes are. You need to learn to not let that bother you and learn to spend less money on those things . Not necessary. Have 10 jackets or 10% shoes. 10 pairs of pants, right? It's not necessary to have a $20,000 car, but a $10,000 car will do etcetera. So going to learn how to not care about the possessions or wealth of others. The funny thing is, a lot of people spend more than they make on having a nice house. Nice car, nice clothes. Excedrin. That's why everybody's in debt up to their eyeballs. People use their credit cards, things like that. So we're looking at possession that people may not even actually own. They may have gone into debt to buy, and it's ridiculous that that makes us feel bad by not having those same things. As Warren Buffett says, you learn to have an inner scorecard. Easy. Don't compare yourselves to other to others. In other words, you need to know who you are. Internally. You need to know what you want. You need to score of your life and how happy you are and how well you're doing in terms of accomplishing your goals, and your dreams, regardless of what other people are doing, should not be measured yourself. Compared to other people, you have an inner scorecard. You can orient yourself that way over time than this social proof tendency that's keeping up with the Joneses. Tendency will diminish and you will start spending less money and unnecessary things, and you will start saving more money to invest. By understanding our social proof tendency, you can learn how to spend far less money. Most of us, if we're honest, we spend a large portion of our income unnecessary items like the daily lot. You know that extra $5 here, that extra $10 there, that money really does. And on if you know that it could be compounded and double every few years. If you're getting a good return on your investments, you will be able to control this test English more easily. In the words of Benjamin Franklin, Penny saved is a penny earned, or even even better. The way to look at it is that every penny that you save can be invested and can earn you compound interest and make you well. That's the way toe. Think about. So the social proof of keeping up with the Joneses tendency is a very, very strong one. But by reflecting on this and thinking about it, and over time you can try to manage your behavior and don't care what other people have or what other people think about what you have. It will help you. A lot of the goal is to become financially independent and something else for laid into. This is this fear of missing out tendency, which I already mentioned earlier another very, very powerful psychological force that we have. It tends to lead to all bad financial behaviors, and I mean, did you guys some good examples of this in the next lesson? 10. Lesson 9 Fear of Missing Out Tendency: people lost a lot of money at the end of the 19 nineties due to this tennis. This fear of missing out, they saw other. We're getting richer faster than them, and they were in that they were not getting rich as fast other people and they took ever greater risk. This is really crazy to think about it, but it's a psychological thing that we tend to do. We don't want to say that people getting rich when we think that maybe we could be doing the same thing. We should never worry about someone else getting richer faster than us. There will always be someone that's getting richer faster, so it's a really crazy thing toe work about, if you really think about it rationally. And it's such a strong floors that even, you know, the experienced investor who's a billionaire George Soros, who is very famous. He couldn't stand seeing others getting richer than him investing in tech companies. And he got killed. In the words of Charlie Munger. Now this is someone who became a billionaire due to his investing prowess, and even he couldn't stand it. And Warren Buffett, Charlie Munger, they were getting criticized in the 19 nineties were missing out all money as they saw that the tech stocks going up for ever to seem like it was never gonna stop. And these guys getting criticized, people said, You know, they lost their touch. They don't understand, you know, investing anymore. They're old codgers, etcetera, etcetera. But what they understood was that it's not worth paying infinite price or an asset when a company is not making any money, but they're showing a lot of growth in users, but not actually making a profit. That asset is not worked very much. Is basic finances basic valuation of businesses? But people didn't understand that. They just follow the market and they all got killed. So you know, this fear of missing out is a really dangerous thing. When it comes to money, don't be worried about other people getting Richard. Where is this related to social proof? And it's related to keeping up with the Joneses because it's comparing yourself to others. You know you're happy getting it seven or 8% or 9% return on your money. You know that's going to help you achieve your investing goals and getting financially independent then it is a matter if your neighbor made a $1,000,000 off, you know, Bitcoin or off that a new AIPO is totally irrelevant. Maybe they got lucky. That probably gonna waste that money anyway. So this is something that we need to learn to not worry about when markets are going up. There's this really, really strong psychological pressure to buy for the fear of missing out on more profits, a strong pressure, and it's very dangerous at the higher the price of get. Because the higher prices go, it's actually increasing the risk rather than lowering it, even though we feel like prices are gonna keep going up. Because, as I said, we tend to look for patterns and we follow the trend. The higher the prices go, the risk here, the investments and lower the crisis go lower. The risk is this is what we need to understand. This is why warm up. But he looks at the intrinsic value of an asset when investing. He doesn't care about stop price. He looks with business and how much money is producing and discounts their cash flows to the president. This called the discounted cash from all talk about it. More years. Basically, you can actually value asset a business to have been a very, very narrow range of values. And you can actually say this company is worth about this much. When you look at the stock price, you go, Wow, that stock prices showing that this company eyes work way, way less. So this have you really, um, good time to buy? Because the actual intrinsic bound according to our estimations, higher than stock price. That means that we're getting more value than paying for. The converse is true. The asset is trading at a high evaluation, and we look at the value of the company based on our analysis and we go, there's no way to companies worth that much. It would be crazy to buy, uh, or in to invest in the stock market when prices are higher. So we look at the intrinsic value of an asset. Remember Mr Market, the market stock market or the real estate market? The price is that they're offering. That's not actually what the asset is work. That's what the market right now, it's saying it's works sometimes very accurate in terms of the intrinsic value Sometimes it's way over price. That's what we have. A bubble. And sometimes it's the press when we have a recession or a depression. Okay, this is the same thing goes for real estate or any acid that produces cash. You have a rental property that you paid X amount of dollars for. It produces X amount of cash that tells you what is work. If you put $100,000 for a house and he rented out at $600 per month, you're making around $7000 or 7% Cath low on that asset so you can value that asset based on the cash. Those things that don't have cash flow are nearly impossible to value, actually, and you're just at the whim of the market. And this is why investing in the stock market and becoming a business analyst is the way to go. Or if you don't have to do it again, just invest in a little cost in next one. Sometimes prices are in line with intrinsic value, and other times they're far out of whack. I want to emphasize this because the market is just giving you quotes and these huge swings in price. They will provide you with opportunities. Or they will tell you, Stay away, prices really low. You have opportunities to black in prices. Price is really high. You should stay away. It's a simple is that not any more complicated than that? It's just that it's simple, but it's not easy. It takes discipline for two patients, all of these things, and it takes ignoring the crowd to be a contrary and do the opposite of what the crowd is doing. That's why the whole phrase I agree with others of fearful and fearful with others are greedy. It's such an act phrase. It really describes the situation very accurately. But it's easier said than done the 19 thirties. It was one of the best time to buy stocks. Does people were fearful. The great crash This happened. It was a great Depression, and stops were a little trading and just totally depress prices. And you would have thought about two stops in 19 thirties if you have cash. Most people didn't that's one. The reasons why didn't depress and he would have held him over to the 19 forties. You would have become very, very well And if you would have bought a whole bunch of stocks in 19 nineties, as prices just started going through the roof for during the late 19 nineties and then held them through the crash, you would have lost a lot of money. So you have to look at the prices of assets and decide whether or not risk is high or risk is low. But having a fear of missing out when prices going up is very, very dangerous. And then, of course, the next thing I want to look at it just good old fashioned re. This hurts people's financial decisions and it doesn't have to. So let's look at that and see how we can avoid greed and why that tends to make people lose a lot of money. 11. Lesson 10 Good Old Fashioned Greed: Charlie Munger has said. Desire to get rich quick is pretty dangerous, and the reason that's shoes does. It forces us to try to push our assets to rates of return that are impossible basic, that are unrealistic. We want a shortcut. Want to get rich fast, of course, is lots of reasons for this, but basically it comes down to us is being created. We don't want to have to wait. We want things fast. That's just the way the world is now. Maybe it's the way it's always been. All stands on. Artists are able to exist due to the large number of greeting people, the world. I mean, if something sounds too good to be true, it probably is. The only reason that con artists are able to succeed in conning people is because they paint a picture of easy money, something that can't be true. And they're really, really good at doing that. Greedy people say OK, let's go ahead and invest the money and then they end up losing it all. Another thing the other way to put this has warmed up, and it said some things just take time. You can't produce a baby in one month by getting nine women pregnant. It's a pretty interesting example, but you're saying, you know it takes nine months to make a baby. Okay, you can't change that. The same thing is true with investing, because when you buy an asset based on the cash pools of a company or of a real estate property, you have to wait for the prophet to come in. It is a natural cycle and worn. But he also criticizes like quarterly. You earnings reports is pretty arbitrary to think about the fact that one year company should make a certain amount of money. Would you judging a company based on this one year performance? A lot of things that are happening in businesses they take a long time. We're talking about developing products and taking time to developed markets and a cell, a spot. It's a road market and get customers. All these things take time. That's why he looks at five year or 10 year cycles. When you invest, you have tow, give your investment time to grow and is a natural growth that will take place. It's just like when you play a C. If the wait for that seed to turn into a little plant and grow into a mighty oak, right? You can't shortcut that process during that seed into a tree. There are no shortcuts. Toe Well, so get it out of your head, you know, trying to win the lottery. You're trying to go to a casino. They're going to lose money. It's a net negative value activity. That's why casino's make money that the cars are literally stacked in their favour. But that's OK, because if you learn, just enjoy the process. To just wait to earn money and to invest it wisely and let it compound, you're virtually guarantee to become financially independent over time. Just don't be greedy. And don't be impatient and you will get their understanding. Money and investing just being disciplined give you their overtimes pretty much a guarantee . Just don't freak out and do anything stupid. You have to stay the course. The odds of winning the Powerball lottery jackpot in the United States are 175 million to one. So despite the fact that you've seen people wait on TV because of course they always announce it because they're trying to sell a lot of tickets because trying to make money from the tax is right. When you win, you know, hundreds of millions of dollars in jackpot. You pay a huge chunk of that in taxes to the government. They want you to think that you have the chance to win. But in fact you don't you would be floor better off investing money, and you would have used for lottery tickets to simply buy assets appreciating assets. Whether that's real estate for you, whether it's gold or stocks, that's where you're putting your money now, things that produce cash Far better talk about that more later, of course. So actually, gold is not best place to put your money. This reason, at least it's an asset that has value is better than buying lottery tickets. OK, so that's why we're gonna look next at the importance of finding the right or to do because this helps you to not be impatient. If you don't feel like what you do, every day is a slog, and it's really hard to make money. You're not gonna be a huge rush to get rich and get out of that work. This is a very helpful factor in being able to be patient as your wealth builds 12. Lesson 11 Choosing the Right Work: this idea seems like an indirect way to solve the problem, uh, investing or being good with money. But the importance of finding the right work cannot really be overstated. And Warren Buffet talks about this a lot. If you do what you love, or at least do something that you like her that you're good at, then you're going to enjoy it more. And you know you don't feel like you're working. Psychologists call this a state of flow. We're doing this work. You kind of lose track of time. You get into a state of flow, and when this happens, we're doing work that you like. There's no longer a really huge rush to get wealthy because there's no rush to retire, right. Most of us want to retire because you only want to work as long as we have to so that we can have financial freedom. But the reason is for most people is that we don't like what we do. I mean, a recent study showed in America that over 80% of people don't like their jobs. 80% is a pretty big majority. Have people not like with a few every day, so Of course, there's a rush to save money and get wealthier. There's a there's a rush to retire, But if you do what you love, there's no rush to retire again. Warren Buffett, Charlie Munger there. 87 in 94 at the time of this course, and they are still going strong because they do what they love. You can take your time building well and slow slowly. Accumulate appreciating assets over time in a very safe way. You don't need to try to get rich quick. Of course, it's hard to not want to get rich quick. If you hate what you do every day, you want to compile money as fast as possible so you can get out of that job you hate or so that you can retire the problem. As we now know from stuff that we've already covered a little bit in this course, you can't force your money to get higher returns just by taking on more risk and the losing money as it being more stressful. And as Warren Buffett says, you know you can't get a woman, you can get a woman or excuse me, you can't produce a baby in one month by getting nine women pregnant. Some things just take time. Investing is one of those things that just takes time. Now you can get more skilled at it, like Warren Buffett and other professional investors, that you can increase your returns. You can get wealthy faster, but they're still gonna be a limit to that. I mean, Warren Buffett. Over the last 50 years, one of the greatest investors in history, he's averaged 20% returns. That's pretty much the maximum you can get over with. Long term. Another reason his returns are actually a slow as they are. They would actually be higher because he's working with huge amounts of capital now, and the larger money gets run from the law of large numbers. It's hard to get a higher return. When he was younger, he was actually getting 30 40 even 50% compound returns in his career. But, you know, obviously, Warren Buffett is in the top one percentile of wealth, but the point here is you find the right work to do. It really doesn't matter that much how much money you make because there's no rush to retire and this will have a very positive impact, sort of paradoxically, on your finances. You don't need to be in a rush to save some money you invested. Over time, you get wealthier, and it's a stress free way to build wealth. And also it's important, understand? You know, even Warren Buffett didn't become a millionaire until he was in his mid thirties, and he'd been investing since he was 11 years old. And you've been saving his money since he was a kid, and he was around $3500 when he finished his master's degree at University of Nebraska. He also studied at Columbia under Benjamin. Graham knows his mentor, who I already mentioned. He's considered the father of value investing. But even Warren Buffett, the great man. The brilliant investor didn't become a millionaire until he was in his thirties, and he made 99% of his wealth after the age of 50. That that has to do with the nature of compounding how you get exponential returns so over time is your capital grows. As long as you don't do anything stupid and lose money, it will accelerate right, and it is pretty obvious if you know anything at all about compound interest. If you make 10% on $100,000 that's $10,000. You get 10% on a $1,000,000. That's $100,000. You're going to start getting rich really fast once you get up into the millions, even the hundreds of thousands. Once you have, say, three or $400,000 savings and you have a 10 or 20% year, you're talking about tens of thousands of dollars that you make passively. The hard part is getting started. The hard part is letting your capital start to accumulate at the very beginning. Which, of course, is why most people can't do it. It goes back to delay gratification, which we already discussed. But the point is, if you find work that you like to do, you can afford to be patient. And by affording to be patient, you could afford to be conservative and not push your capital too hard. Be happy with an adequate return with the adequate return to six or 7% or hopefully something more like in the double digits 11 or 12%. That will make you wealthy over time, and you can almost guarantee to get those type of results. If you're just patient, right, it's a classic tortoise and the Hare story, slow and steady, wins the race. And as cliche as that sounds as pedestrians, that sounds. I mean, it's not sexy in the world of investing in the world of finance, this is the way to go. This is what the greatest investors have to tell us. And the tricky thing is for a lot of us, psychologically, right. This is, of course, about behavioral finance is that we see people win the lottery or receive people get rich off of buying that that sexy I p o or buying you know, Bitcoin when it was new and becoming instant millionaires. But for every one of those instant millionaires, you have millions and millions of people. That's us, right, that have to do it the old fashioned way, which is simply saving and investigated. You have this idea getting rich quick or this dream of this one big investment. What research shows us what history shows us is. The odds are greatly against you. What you're gonna end up doing, Is it getting the opposite result of what you want, you're gonna end up losing money because you become a speculator, you become a gambler. Patience is pretty much a requirement for anyone that wants a guarantee that they become financially dependent, not just hope, not just want to get lucky, not when lottery. If you are just patient, you cook. Compound your money. Over time, you will get wealthy. But it's actually not what most people do. Most people find difficulty patient, so finding the right work that you enjoy getting up every day and doing even if it only pays you enough to say, Let's say a few $100 a month. That's still better than doing a job you hate and then trying to rush to retire. You'll not enjoy a career. You might end up pushing him capital too hard and losing money and also not being as healthy as happy and all these other sort of side costs that happen. So there's a sort of a paradoxical thing, but you will increase the odds of becoming financially independent even if you make less money by doing work that you enjoys a really important thing to understand. So I hope you guys pause. Think about that. And if you're not doing work that you enjoy, maybe need to reevaluate whether or not it's worth it for you and long run almost certainly is to do that work. But, you know, it would be more suitable than what you're doing now. Even that means going back to school or something like that. Now, the next lesson, we're gonna look at this idea of being a careful who you associate with this ends up having ah, really big impact, actually, on your wealth and on your ability to build wealth over time. According Teoh Behavioral Fine. 13. Lesson 12 Be Careful Who You Associate With: So this is another thing that seems like a pretty simple idea. As Warren Buffett and Charlie Munger says, They take a simple idea and they take it seriously. We know that we are, Or at least it's been said, that we are the sum of the five people you spend the most time most people about money because they never learned about it and they spend a lot of time around people that also happened, learn that much about finance and never became really good with money. You're gonna pick up their habits and there attitudes, and there's a lot of attitudes and habits, especially in will, say, America, because that's where I'm from. That's where a lot of our statistic it from, but this is certainly a worldwide thing. I actually live abroad in Asia, and I see people's attitudes about money from all different cultures that I can say with certainty. It's pretty much the same everywhere. Everyone is facing the same challenges and have the same cognitive biases that make us bad with money. So when you spend a lot of time around most people that never learned how to be good with money to pick up a lot of bad habits and attitudes. One of the attitudes is that something we already covered right, that if you want to be wealthy or you wanted money that's greedy or somehow immoral. Of course, if you're breaking laws, if you're hurting people doing things that are immoral, that can be the case. But actually, if you've got a family and you've got dreams, you've got things that you want to do with your life in the world in which we live in, which is basically a capitalist world now I mean globally everywhere is kappas. I mean, actually in Vietnam, which is a communist country, but it's actually in some ways the market is more free than back home. They're far, far fewer regulations on what businesses can do, believe it or not, and so pretty much everyone. The world now is capitalist. I mean, money is just a fact, uh, life. And to deny that is simply denying reality. That's the way the world is. That's the world that we are living in, that we've been born into. Okay, so spending your time around people that are good money, we'll have good attitudes about money about building well, not greedy. You know, arrogant people, you know, people you see on TV, this sort of archetype of like the aggressive, ambitious businessman who is like, really mean and takes advantage of people. That's television. That's an avatar. That's not necessary. Reality. What you'll learn if you become friends with a lot of wealthy people, especially people that made their wealth by themselves, self made people is that oftentimes or some of the most generous people, they give a lot of money to charity. They simply understand the nature of building wealth and the nature of building well. Oftentimes is psychological, which is, of course, what this course is all about. So choosing who you spend your time round, it means not spending time around negative people. It means trying to become friends with people who are educated about money, about finances, of up business. Maybe they're entrepreneurial. I mean, I personally have had to cut out a lot of friends in my life, not simply because of my money, but just negative people. People that tend Teoh wine Orgryte for have a victim mentality. Those people will hurt you because if you take on those attributes, you tend to kind of become the same way. You sort of blame other people for your lack of success or happiness and sort of wine, and, you know, following a self pity and things like that. So this is a really important thing that seems like it's indirectly related to money. But just to be a happy person of a successful person in general, you really need to choose carefully who to associate with. In many cases, that will mean not being friends with some people that hold you back. I mean, you have to set your priorities. You have to make it shorts. If it's important for you to be better with your finance, to be better with money, to become financially independent than who you choose to spend your time with is very, very important. So it means stopping friends and spending time. But people who think that money is evil, but that money is hard to earn because it doesn't doesn't have to be that rich people are evil. For that, rich people agree, or that wind to make more money makes you greedy. The stock market. It is gambling. All investing is risky. None of these things are true. Of course. We all know examples of some people who are grease some rich people who are greedy well, with examples of, you know, ways of investing in the stock market that is gambling, as we've already talked about earlier in the course. There's examples individual cases of all of these things that does that mean that we can generalize and say that money is evil or that rich people are greedy, Those air over generalizations, lots of poor people that are evil and for people that are greedy as well. Basically, money is neutral. It can be used for good. It could be used for bad. Most of us need at least a certain amount of it, so it's neutral and understanding that the fundamental level will help you have a better emotional connection to money. And you integrate sort of all of these ideas that I'm talking about. In this course in general, your finances will start to improve. You start to feel better about lying to feel better about your finances. You combine them all together and your life will start to change at least your life as it relates to your finances, which is a force related toe everything else in your life these days as we live in a free market capitalist society. So oh, you got to think about that. And I think it's a really important thing Warm up. It says that risk is not knowing what you're doing. There's all kinds of financial theories about risk. A lot of the business schools teach that risk is volatility. So when volatility is high, meaning that stay with the stock market prices going up and down inflection a lot, it seems risk in the short term. That's true because of you tryingto buy and sell stocks, which is ownership pieces of businesses, right, trying to buy and sell every day, every month or even every year. You might lose money that way. That's risky. But if you're talking about holding assets over a long period of time assets that produce cash assets that are producing value, then really it's not risk. Risk is not doing what you're doing and doing something stupid. Okay, so you need toe, spend your time around people, or maybe cultivating new friendships and associations with people that understand these things. It's no coincidence that there said before that, professional investors, at least the best professional investors and consistently outperformed the stock market or at least get adequate returns from their investments. And it goes back to being conservative and careful about your investments. A lot of it is not about trying to get great results. It's about avoiding bad results, avoiding losing money, avoiding making mistakes even by simply buying something like utility companies that pay high dividends. And I protected by the government that regulated. So because utilities, electricity, water companies, we need those services. Those are not sexy investments or conservative investments. You can pretty much count on at least 58% if you conclude the dividend and a little bit of appreciation every year. That would be considered an adequate return. Taking on very little rips. Now that may not get you rich fast, but over time you're almost virtually guarantee. Do become financially dependent. You can invest consistently. My grandma actually did this very thing. She was a teacher, She's a retired teacher, and she had just been buying a utility stock, which one company, because her father was my great grandpa. He had been on employee for a company called a Washington water power's now called Vista in the United States, and they're a typical utility. They serve the Northwest, and they usually have a pretty good dividend and varies. But anywhere from 3% of 5% depending on what's going on in the economy and such and over time that made her financially independent, just held onto that stock and added to it. We invested all the dividends, and it's very, very simple thing to do. Of course, professional investors will tell you it's a overly simplistic and you should pay them for their services because they can make you a lot more money. But basically, if you understand the basic fundamentals of finance and you just do the simple things and avoid making any big mistakes by trying to push your capital too hard, you're gonna end up doing really well. Most people don't do these very basic, simple things. Don't It's hard to believe how easy it is. It takes patience. It takes discipline, but it doesn't take anything fancy. Warren Buffett is famously avoided investing in the technology sector because it's outside of circle of competence. I mean, until it's a recent investment, Apple, which she actually considered to be a consumer goods company that he can analyse, understand rather than a tech company. So another simple idea here is that Warren Buffett he invests in things that he understands . So my grandma understood utilities, right? I have certain ways that I invested, I think, in companies that understand if you understand finance and banking, you might wanna invest in that sector because you can analyze those businesses. You understand retail consumer goods and analyze and invest in those businesses. You want to stay within your circle competence, as he says. So it's another important idea here when it comes Teoh lowering your risk when you are investing, most people don't do that. Most people watch personalities on TV like Jim Cramer, or they read articles and any sort of all that advice. But that doesn't work because you will get contradictory advice from every single person writing article, every single so far, professional talking head on TV. The best thing to do is to be a contrary in and think for yourself. But in general you want to have the attitude that investing is something that can be learned, that it's not something that is a mystical or or complicated. It's simply a matter of lowering your risks. And behaving in elated of rational behavioral finance is all about behaving in ways that are rational and cutting out all kinds of stuff that make us emotionally, uh, make mistakes about money. Fearing loss, being greedy, taking on bad attitudes of others have keeping up with the Joneses and understanding that risk is not volatility. Risk is not investing in the stock market, real estate just automatically being risky. Risk is not knowing what you were doing, and by choosing to invest in vehicles that you understand, you are lowering your risk. For example, you understand real estate well, then you should probably be investing in real estate. You'll know when it's getting to buy. You'll know about that market. You can analyze the value of properties. If you understand how analyzed businesses, you should invest in the stock market and choose sectors that you understand. If you understand another night of those things and you also have no interest in the stock market or real estate, then you should do what Warren Buffett suggests, which is simply invest in an index fund of something like the S and P 500 with a Vanguard 500 or the Wilshire 5000. All these different indexes. You could even just invest in the Dow, which is just 30 of the biggest blue chip companies in the world. Just invest in those and overtime history tells us you will get roughly. Do you ever take a point or two a 9% on your money compounded? That's gonna get the job done for you. The thing that most people don't do is that we don't have the patience to simply do that. It almost seems too simple. Almost seems too easy. And also the nature of the stock market, as we learn from the Mr Market lecture makes it hard to take the ups and downs and things like that. So just keep in mind the difference between investing and speculating. They're two totally different things by an ass and is hoping that it goes up or trying to time the market and thinking it's gonna go up or listening to some talking head on TV or reading some article. They say there's a prediction about the market's gonna do that is speculating. It's the same thing as going to the casino and playing a slot machine. Investing is totally difference about valuing and asset based on true intrinsic value. And being careful who you associate with who you listen to you talk to you about finances will help you a great deal over time when it comes to building well and in general being good with money. So I want to stay on this idea of investing versus speculating because it's such an important thing to understand. We need to get it out of your head that investing is risky or that it's gambling. Nothing could be further from the truth. It's all about understanding what you are. 14. Lesson 13 Investing vs Speculating: So I want to be a little bit repetitive here when it comes to this idea of investing versus speculated, because it's so important and most people don't seem to understand this idea. Speculating is buying an asset and simply hoping that it will go up in price. It's gambling. You're just hoping you're guessing not based on anything concrete. Okay? Investing in the hand requires a thorough analysis of an asset and its current price, and then Onley buying that asset when there is an obviously high probability of achieving an adequate return. An adequate return is whatever you feel, we'll get the job done for you might be 5% compounded. That might be 10% compounded. That might even be more and adequate returning that your money will compound at a rate that will help you achieve your financial goals. As we know, simply investing in an index fund will get you eight or 9% over time. It's a pretty good return, and we definitely could say that's an adequate return. So if you did nothing but buy index funds have very little fees, and simply dollar cost average is into them, which means invest the same amount of money every month, just socking away in the index fund. Over time, you will become a millionaire in 20 or 30 years. Anybody, literally anybody that can save a couple 100 bucks a month, can do it. That's investing if you want to get even better result when analysed businesses look at it at their balance sheets in their income and their assets and debt, and then look at the price of that stock. If you get good at doing that, then you can increase your returns even more out. Taking on more risk. There is this dangerous thing that is taught in business schools, and even then you see on TV that volatility equals risks and in order to get a higher return it to take more risk. But if that were true, that would mean you'd actually be increasing your odds of losing money. How, that's very paradoxical. You, In order to make more money, I have to take on more risk. That means maybe you're gonna lose money. That's just gambling, right? That's that would be gambling. Why is it that Warren Buffett can make money consistently? He's not. It's not because he's lucky or because he's taking on more risk, is because he knows what he's doing because he's know something investor because he's knowledgable. If you're not knowledgeable, you buy index funds. If you are knowledgeable, you lower your risk by analyzing businesses. It's a simple as that, and it doesn't go any further than that. So make sure that what you're doing when you invest your money with you, put it into gold or when you put it into real estate. Or would you put it into stock market or anything else that what you are doing is investing conservatively and not speculating. And again, I will just mention that since gold and other precious metals they do have some value because there's a market for them and people hold them in the hedge. People described onto them their non cash producing assets, so gold will never appreciate in the long run, as much as a well run company that produces profits growing profits over time. So that's why people like Warren Buffett they far prefer owning businesses i e. Stocks, as opposed to owning gold or other metals. Warren Buffett says he will take gold is a gift, but he would never buy it. So just something to think about. A lot of people really believe in gold because I think it's a concrete asset. Whereas the dollar with the stock market often crashes, the price of gold crashes as well. I mean, it fluctuates a lot as well. But some people think that owning these hardened metals is something concrete cause physical thing that you can own. The problem is, is that thinking is flawed because they don't produce cash cash that could be reinvested for compound returns. Businesses produced cash, even a business it doesn't produce. Um, ever growing amount of sales and profits as long as it produces it. Consistent profit. Those profits can be reinvested for growth. So, for example, Warren Buffet famously bought a company that he loves. Cult See's Candies in the 19 seventies paid $25 million for it, and right now it's a very small portion of Berkshire Hathaway small company, relatively speaking. But he constant use it as an example because even though sees is not growing its profits and earnings much overtime. It's so profitable in terms of having high margins and being really consistent, they're able to take those profits and then reinvest them into other businesses that have higher returns. That's basically what we're trying to do, right? You just have Let's say we have a regular job. Let's say you can say $500,000 a month, you're taking your surplus from your job and then you're investing into businesses that will grow your capital. Based on how well that that business is doing that you'll get an adequate return. Buying gold is kind of like gambling, because even though gold tends historically hole is value and go up slowly, it doesn't produce cash. So I just want to make sure that I mentioned that to you guys. So simple rules you don't understand an asset don't vanish only by an acid that you can understand analyzed, basically, look at how much caps is gonna produce and being able to predict to some degree what it's gonna be producing in the future. This is what Warren Buffett like. Simple companies like Coca Cola like Gillette and certain banks, you can pretty much guarantee people are gonna still be drinking Coca Cola in 10 years or 20 years. You can pretty much guarantee that men are going to be shaving in 10 years and 20 years, especially with a product like Gillette, where they sell the razor blade, which wear out if you can continue to buy the razor blades. It's a very, very good model for repeat cash flow. Also, when he likes insurance, everyone has to have car insurance, medical insurance and all different kinds of insurance. It's a good business because it's consistent and he takes the money from those businesses and then he reinvest it in other consistent business is very simple. People often overlook how simple what war above it does if, but like continually doing stuff. And he understands that is simple and that he can analyze. He gets above average returns and doesn't have to be super complicated. But it does have to be something that you could be disciplined about and the patient enough to wait for those returns to come in. You don't even have Teoh accurately value an asset. It says that you cannot actually value an asset, don't buy it. But if you buy an asset at a cheap enough price, it could be a conservative investment. And if you can't come up with any kind of, ah, accurate value. You really just have no idea what the value is because the business results fluctuate so much or because it doesn't turn a prophet. All simply don't buy it right. You don't have to swing at every pitch is Warren Buffett says it's by the like investing. They wait for a fat pitch. They wait until they see an obviously good investment, something that's undervalued, and then they buy as much of it as they can. They put the bulk of their assets into this. Obviously good investment is the opposite of diversification, which we discussed a little bit. Previously, prices of valuable asset are near historic lows. It's probably safe, right? I mean, if the stock market crashes and the stock for was used, Coca Cola as an example, goes down by 30 or 40% from what was already a reasonable price, then you know that it's probably safe to buy that asset, and your odds of making money are really, really good. Another hand of prices of a valuable asset are near historic highs. It probably isn't safe because you have more downside than upside. Investing is all about probabilities, so when you buy. When markets are low, it's the best time to buy. You have more upset you by when markets are high. It's the worst time to buy you have or downside. So it's really a simple is that the problem is something. You have to wait a long time for markets to go down before you get a really good deal, and so may have to wait a long time for markets to go up so your money can appreciate. So patients in investing is a critical critical attribute that you have the happening. You're not patient again. A simple thing to Dio is to buy, index bonded and just forget about it. Don't even check the prices. Just wait and you will get your adequate return. These things are all psychological. That's why it's called Behavioral. Find it. It's not even about skill, necessarily. A lot of it just acid do with the psychology of being able to not freak out. When your assets are varying in price and going up in it going up and down in value just because an asset is valuable, that doesn't mean it's worth infinite price. So what that means is you can look at a company like Amazon, which is always the news for its great growth and all the things that is doing. But just because Amazon might be an amazing company and might have great management and all these great things going for it, that doesn't mean that it's worth paying 300 times earnings or 400 times earnings for it. That means you might be taking a huge risk, even though the company has great the reason the prices so high because the company's drink that doesn't make it a good investment. Same thing for a lot of companies like, for example, Tesla is a company is very famous. For now, they're producing electric cars. Have got a very charismatic leader named Elon Musk, now investing in Tesla. There, they've been losing money for a long time, or they make a very small profit some quarters. But their stock trades for a higher valuation than stalwarts like Ford and General Motors and others, despite the fact that they sell millions and millions of cars every year and test the only cells a few 1000 cars every year. The reason. The stock price is so high it's based on anticipation that their plans of rapid growth are going to be fulfilled, in which case people may end up making money off of that stopped. But the thing is, it's very unpredictable. Therefore, it's very risky. I wouldn't want to buy that stock because there's a lot of downside potential. It could crash, I just don't know. But if you buy right now, for example, a company like GM, which is trading at only six times earnings and has a 4.5% dividend that has been selling cars for decades, has been profitable for decades. I'm not saying now it's a great company to buy it. But just as a comparison between those two GM far less risky and you're almost certain to get an adequate return by a company that has stable earnings. Iselin trading at six times this year's profits and also has a 4% dividend that will almost guarantee you an adequate return, and investing in that company or a company like that over 10 20 or 30 years is going Teoh guarantee that you will build wealth and eventually become financially independent. Okay, it's like what Charlie Munger said, being conservative and not expecting miracles is the way to go. That's investing. If you like gambling. If you like speculating, if you want to try to hit a home run and by the next new hot stock, I mean, just know that what you're doing is speculating. It is gambling and you're likely you're more likely to lose money doing that. And you are to make money so at least know that that's what you're doing. There's nothing wrong with gambling. If that's what you want to do with your money, right, it's your money. You can do it. You can try to make a 1,000,000 overnight, and some people do. But the odds are not in your favor. Okay, if you have no interest in or cannot do the latter, which is try to identify great companies to invest in, then you should simply invest in a low cost index fund long term average return of 9%. I keep bringing this up because there's so much data and there are so many statistics that show that you will outperform. It's hard that his book to believe 90% of investment professionals by simply buying an index fund because of the low fees, mostly a hedge fund or mutual fund. They may sometimes actually beat the market over periods of time, but then they take their fees, and their fees oftentimes are one or 2% even higher. Escape those fees out and you're compounding gets hurt badly if the fees that really kill you. And so just by simply buying index finally not paying those fees. But there's nothing to think about is nothing to worry about. You just put the money in and wait. And one of the reasons why and again behavioral finance is a psychology. People simply can't stand to do nothing and toe wait. It's just too boring for them. They want to follow these companies, and they wanted the active by and South. But that actually hurts you. Warren Buffett has said that in the stock market, money flows from the active to the passive. We should heed the words of the greatest investor in history who has a 50 to 60 year record that has never been being will probably never be beaten. Some people say Well, other people like, for example, Peter Lynch. He has a higher compound return. Then Warren Buffett His investing record was only about 14 years or so during the eighties and nineties, when stock went through an unprecedented boom and basically they went through a bubble. And so there are a few other investors that I've gotten even higher returns and Warren Puppet, but nobody has done it for 50 or 60 years. We're about 87 and his company's been going for like, 50 years. Before he got his company, Berkshire Hathaway, he was making 40 50% compound returns. And so if he tells you that you will be 90% investment professionals of buying an index fund, we should believe that he knows what he is talking about. Okay on. And so the next thing we're gonna look at, it goes back to something that I've been talking about throughout the course as well to be investing in cash producing passes 15. Lesson 14 Invest in Cash Producing Assets: again to talk about gold. Warren Buffett says he'll accept goals, a gift that will never buy it because it doesn't produce cash. Therefore, its value is based entirely on what people are willing to pay for it. We hope that people will always be willing to pay for gold, and so gold probably will always hold some value. If the stock market crashes, the real estate market crashes. Usually that makes the world go up. That's what people consider gold to be a hedge, and everyone showed some of it. Warren Buffett doesn't own any gold because the stock market has outperformed gold by an extraordinary degree over the long term. Give me an example. $10,000 invested in gold in 1942 would only be worth about $400,000 today. Well, that same investment of $10,000 in just an S and P 500 index fund will be worth $51 million . Now that may be hard to believe. You can run the numbers yourself. That's the nature of long term compound interest. When you compound your money at nine or 10% over. In this case, about over 70 years right, I guess almost 80 years now you get astronomical figures. Obviously, none of us are going to be able to wait 70 or 80 years for our money to compound. But most of us can wait 20 or 30 years for our money to compound. It will go up into the millions if you can just wait, be patient and ignore the ups and the downs. And remember, over this time period that we're looking at here we had World War two right? 1942 was in the middle of World War Two. We had the Vietnam War. We had a huge market crash in 1987. We actually had a big recession. Also in the seventies, we had the dot com bubble burst in 2000. And, of course, we have the great recession in 2000 2000 and nine. If you had just left your money and index fund throughout all those ups and downs, it would continue to compound, whereas gold just goes up in value slightly. I mean, it's barely outpacing inflation. Sometimes gold will go of a lot in one or two years if you're lucky enough to time. That and triple your money in a couple of years. Well, good for you. But that would be Look, that wouldn't be investing. That would just be lucky. Timing of the market. Okay, so it's important to understand The reason that the S and P 500 compounded so well is because it is composed of 500 of the strongest businesses in America that produce cash in the way that these indexes work is that companies that are shrinking or not doing well they get dropped out of the index and new up and coming companies get put into the index of the the index is always changing. What companies are included are changing. And so it's like a self cleansing system sort to speak so to speak with is only the best companies the most profitable companies that are part of these top indexes. And they make cash stocks and real estate as well produced cash that could be reinvested for compound returns. And that's the main idea. So a lot of people like to buy stocks that have dividends. And if you reinvest the dividends, it's another very conservative way to invest. You keep your money compounding you don't touch the principal. An outstanding company will produce ever increasing returns that can turbocharge the rate of compounding. And it gives you ever larger exponential, gross ever increasing returns. We want exponential growth, and that's the reason why eight or 9% compounding will make you rich over time. It's simple, but it's not easy because of the emotional challenge of watching your money fluctuate. Okay, if an asset does not produce cash, it's risky because I cannot be objectively value. I mean, if you look at gold and you say how much should announce of gold be worth? The only thing that we can base it on is what prices have done in the past. We can look at the charts about the value of gold, but gold doesn't produce anything. There might be more demand for gold because being used for more jewelry or it's being used a za component, some technology. So maybe if we can predict that is gonna be increased. The man for goal. We can speculate that it's going to go up, but that's the best we can do when you look at a private company and you see that it produces a certain amount of money consistently, we can come up with a riel accurate value for that business. Here's a simple example. If you don't know anything about valuing businesses, if you have a private company that earns, on average about $100,000 per year, it could be conservative valued at about half a $1,000,000 depending on lots of other factors, of course, with other things that go into the valuation. Besides just be burnings such as the competition, the changing nature of the industry and market and things like that, how much that they have things like that. But usually we look at a private company and five times one year's earnings. It's kind of, ah, benchmark. It's a typical sort of a figure that will look at so you can look at the business and say, OK, this business produces consistent $100,000 profits. We're talking about profits, not revenues. After all the expenses were taken out, we can say that a reasonable person would say something like $500,000 for that business. It's worth five times its earnings in the stock market. Of course, the earnings multiple is usually 10 times 15 times or more because of the liquidity of the stock market because of the quality of the companies. The reason that they're even listed on the stock market originally is because they've been very successful in the past. So that brings multiples you pay for publicly listed company on the stock market, I usually much higher. Of course, right now, in 2000 and 18 the multiples air you higher because interest rates are still very low. Interest rates have been going up. But when interest rates are low, the stock market's going to be higher because there's not very many places to invest. Your money in the demand for stocks, therefore, is much higher. And so the earnings multiples for companies people are paying for is hires. Just rates go up. Then stock market will have pressure to go down because the alternatives that people have, where they can put their money in T bills or bonds, the interest rates will be higher. And so a lot of people will choose to allocate capital there. That's kind of a whole nother topic, but basically the point that I'm making here is that a cash producing asset, like a business or like a real estate property. You can value that, or as a Bitcoin or gold or silver, or even commodities like coffee or orange juice or oil. It's very difficult to put a value on that because those markets fluctuate based on supply and the man alone, whereas businesses are valued not based on just a supply the man. But it's based on how profitable that businesses. This is a very, very important idea to understand understanding this we can, conservatively, by companies that produce consistent cash flows and know that over time our investment will produce an adequate return. It's basically a guarantee. Okay, so knowing that you could learn that analyzed businesses and being a good investor, you don't wanna have to do any of that by the index spot. When it comes to commodities like gold, there's no way to objectively value it. And I want you guys understand this concept. This goes to the heart of understand behavioral finance, understanding the rational, you know, way that investors, smart investors think about assets and how to allocate the capital towards assets that will appreciate in value. Okay, And so the next lesson we're gonna wrap it all up and kind of review. The most important ideas of the course 16. Lesson 15 Course Review: So let's take a look at the key ideas in the course. First of all, we started out looking at how human psychology it predisposes us to be bad with money due to the leftover trades from evolution due to the fight or flight, short term nature of the way we are wired. That's why we need to understand that delayed gratification, that taking money that we could spend now and putting in a way to be able to spend more money in the future is a habit that we have to develop. The psychology is a result of evolution helped us survive in different conditions so we can overcome this psychology and these bad behaviors through training, which is what hopefully this course in some small way can start to help you to do by understanding the nature of markets right with the Mr Market idea that we talked about, the average person can increase the probability of becoming financially independent over time to a virtual virtual certainty, a virtual certainty. If you invest conservatively in strong cash producing assets where you're happy to get an adequate return, you will build wealth over time and become financially independent character and discipline , arm or important and I Q. When it comes to building wealth, don't be intimidated by the stock market or the real estate market thinking you're not smart enough, The G idea is you pay less for an asset than what it's worth, or at least make sure you're getting something of concrete value. When you buy an asset, it's that simple social proof and fear, missing out obstacles that must be overcome. But it comes to building well. Never you worried about your neighbor or your calling or anyone you know getting richer faster than you. This is the cause of a lot of bad financial results in a lot of big investing mistakes. First of all, you don't even know if they really are getting richer, faster you they could be lying to you without wealthy. Their house could be based on 100% on debt and bad credit. You have no idea what people's actual financial situations are. Someone look rich and before someone can look for and in fact the very wealthy. So we need to train ourselves not to compare what we perceive our financial picture to be to other people. We have to have an inner scorecard that Warren Buffet talks about. This will help you emotionally and psychologically to make better money decisions. Good investments are simply assets that consistently produce ever growing amounts of cash i e. Profits over time or if they're not ever growing amounts of cash. At least consistent profits that can be reinvested in other assets that will also produce profits were looking for long term exponential returns. An adequate return here can be defined as anything from about 5% to 15% will say that's an adequate return that will build wealth for you enough to make you financially independent over time. If you are lucky. And of course, um, if you will get lucky, maybe you will produce a higher return than you expected. But the idea here is to be conservative and not expecting miracles. And paradoxically, by being conservative and not hoping for a huge return, you actually increase the odds of you having that return because you're lowering your best in the key here to rolling your risk is that the price you pay for an asset is of vital importance. It's better to pay less money for an adequate average sort of, ah company. And it is to pay way too much for a great business that's overpriced. So you really want to understand this? Warren Buffet talks about how you know if the price of hamburgers go down, we celebrated. We're gonna be eating hamburgers for the rest Our life. We don't want over paper hamburgers. The same thing is true for stocks. The price of stocks broke down. We should buy more of them when they go up. We should be selling them, not buying them. This is something that most people don't do, but it's the whole basis of being good Investor, as Warren Buffett says, be greedy when others are fearful and fearful. When others agreed that the big money is made when markets are crashing and people have cash available. Most money is lost when there's a big bubble and people are buying as prices go up is what most people do and the exact wrong thing to be doing this completely based on psychology. So this idea of understanding behavioral finance, this explains a lot of bad behavior. It explains why markets go into bubbles and crash, and just by simply having this knowledge. We can look at our own behavior and we can change the waving behaved to not do what others do. So that's, you know, avoiding social proof, avoiding the comparisons and thinking independently, um, a leave you with a final thought. Um, that Charlie Munger said being conservative and not expecting miracles is the way to go. So keep that in your mind as you go out there and start investing on building well for yourself and become better with money than you were before. Thank you for taking the course and