Page 68 - Morgan Housel - The Psychology of Money_ Timeless Lessons on Wealth, Greed, and Happiness-Harriman House Limited (2020)

encounter with the real world. If you’re projecting your income, savings rate,
and market returns over the next 20 years, think about all the big stuff that’s
COBACOBA
happened in the last 20 years that no one could have foreseen: September
11th, a housing boom and bust that caused nearly 10 million Americans to

lose their homes, a financial crisis that caused almost nine million to lose
their jobs, a record-breaking stock-market rally that ensued, and a
coronavirus that shakes the world as I write this.

A plan is only useful if it can survive reality. And a future filled with
unknowns is everyone’s reality.

A good plan doesn’t pretend this weren’t true; it embraces it and emphasizes
room for error. The more you need specific elements of a plan to be true, the
more fragile your financial life becomes. If there’s enough room for error in
your savings rate that you can say, “It’d be great if the market returns 8% a
year over the next 30 years, but if it only does 4% a year I’ll still be OK,” the

more valuable your plan becomes.

Many bets fail not because they were wrong, but because they were mostly
right in a situation that required things to be exactly right. Room for error—
often called margin of safety—is one of the most underappreciated forces in
finance. It comes in many forms: A frugal budget, flexible thinking, and a
loose timeline—anything that lets you live happily with a range of outcomes.

It’s different from being conservative. Conservative is avoiding a certain
level of risk. Margin of safety is raising the odds of success at a given level
of risk by increasing your chances of survival. Its magic is that the higher

your margin of safety, the smaller your edge needs to be to have a favorable
outcome.

3. A barbelled personality—optimistic about the future, but paranoid
about what will prevent you from getting to the future—is vital.

Optimism is usually defined as a belief that things will go well. But that’s
incomplete. Sensible optimism is a belief that the odds are in your favor, and