Welcome back to our series on The Psychology of Money. Last time, we talked about the slow magic of compounding and how it's the quiet path to building wealth. But letting compounding work its magic requires one thing above all else: survival.
You can't win if you're not in the game. This brings us to the next two big ideas from Morgan Housel's book: the crucial difference between getting wealthy and staying wealthy, and why you can be wrong most of the time and still come out ahead.
We love stories about people getting rich, but we rarely talk about the people who stay rich. The skills required for each are complete opposites.
Getting money requires taking risks, being optimistic, and putting yourself out there.
Keeping money requires humility, fear, and the paranoia that what you’ve made can be taken away just as quickly.
The book tells the story of two investors from the 1929 stock market crash. Jesse Livermore made a fortune by betting the market would fall, becoming one of the richest men in the world. Abraham Germansky was a millionaire real estate developer who was wiped out by the crash. Livermore was the winner, Germansky the loser. But just four years later, Livermore, full of confidence, made a series of huge bets that backfired, and he lost everything. Both men were brilliant at getting wealthy but terrible at staying wealthy.
The single most important word in finance is
"survival." Compounding doesn't work if you get wiped out and have to start over. This is why having a "survival mindset" is the cornerstone of any good strategy. More than wanting big returns, you should want to be financially unbreakable. This means:
Planning for the plan to not go according to plan. The future is always full of surprises, and a good plan has room for error.
Being optimistic about the future, but paranoid about the short-term. The long-term trend of the economy is up, but the path is filled with setbacks. You need that short-term paranoia to survive long enough to enjoy the long-term optimism.
So if survival is the goal, how do you deal with the fact that you'll make a lot of mistakes and bad decisions along the way? The book explains this with a powerful concept: long tails.
In finance, a "tail" is an outlier event—a rare, massive success or a catastrophic failure. The surprising truth is that a small number of these tail events account for the majority of outcomes.
This is obvious in venture capital, where VCs expect most of their investments to fail, knowing that one or two massive hits will generate all of their returns. But what’s shocking is that the regular stock market works the same way. A study of the Russell 3000 Index showed that 40% of the companies in it were catastrophic failures, losing most of their value. Effectively all of the index's spectacular returns came from just
7% of the component companies.
It’s normal for a lot of things to fail. Whether you’re picking stocks or starting business projects, you can be wrong most of the time and still do incredibly well, as long as your few wins are big enough. Even Warren Buffett has admitted that of the 400 to 500 stocks he's owned in his life, he made most of his money on just 10 of them.
Your success as an investor is determined by how you act during a few moments of terror, not the years spent on cruise control. A few key decisions during market downturns will have more impact than everything else combined.
When you put these two ideas together, a new picture of financial success emerges. It's not about being a genius who makes perfect decisions. It’s about being unbreakable.
Success is about having the endurance to stick around long enough to let the odds of a huge "tail" event work in your favor. It means being humble enough to know you’ll make mistakes and having enough of a safety net (room for error) so that those mistakes don't take you out of the game.
So, here’s a question: which is harder for people to accept—the fact that staying rich is a different skill than getting rich, or the idea that it’s okay to be wrong most of the time? Let me know your thoughts in the comments!
