I’m back from a brief hiatus. It might be a little late but Happy New Year! I wanted to note down some lessons I learned in the past here. Here are 5 lessons from 2018:
Mental models: Mental models are the French press for the brain. They help filter out important from the unimportant. They are frameworks that can be used to evaluate ideas and opinions. Our brain is evolved in a way that is prone to biases and mental models guard us against those.
In 2018 I read up extensively on it and used(still using) it to reshape how I understand the world, recognize pitfalls and try to avoid them. Here is a great video of Charlie Munger (one of my mentors) explaining how dumb our brains can be: The Psychology of Human Misjudgement
Opportunity cost: Opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen. We live in the experience economy, people value experiences like vacations, road trips, theater etc more instead of expensive apartments/houses, clothes or any kind of material possession. “Memories, not things” is the new mantra. This is one of the reasons for the rise in the minimalistic lifestyle.
“Experiences are king“, the consultancy McKinsey stated last year in a report arguing that “in recent years, faced with the choice of buying a trendy designer jacket or a shiny new appliance or of attending a show, consumers increasingly opt for the show and, more broadly, for experiences with their friends and families”
I use to give dollar amount parameter maximum weight and in some cases 100% weight when buying something. In 2018, I’ve learned to look at opportunity costs as well as dollar amount. Opportunity cost is a function of time and out of the two, time and money, one is renewable and one is not.
Law of diminishing marginal utility: An economics concept which I’ve come to apply in everyday life. It basically means that the more you consume a product the lesser is the satisfaction. For instance, you just bought your dream Tesla, you’re happy and excited! You use it every day, explore all the features, rack up crazy amounts of likes and comments on Instagram and then a year goes by, and one day you look at your Tesla and you don’t feel the same happiness and excitement that you felt on day 1.
A lot of stuff in life follow this law, including job satisfaction, interest in hobbies etc. There are also some that follow the inverse of this. It gets more productive/useful the more we use it. An example would be Netflix recommendations, functioning relationships etc. I’ve been trying to focus more on things that follow the inverse of this law.
DCF: Discounted Cash Flow is one of the most widely used tools by investors to determine the value of a company. If the value in dollar amount is less than the price of that company, investors buy that company and expect that the price will rise up to the value.
This means that everything has a value and value is different than price. Price is what you pay and value is what you get. DCF stems from the concept called “Time Value of Money”, which means that $1 today is worth more than $1 five years from now (because of inflation). I’ve been using this tool to invest as well as determine fair value things that I buy, like a phone, laptop, couch etc. If the fair value is more than the listed price I pull the trigger and buy it. I’ve been trying to simplify the process and develop a system to determine “fair value” of everyday things(might write a post on it soon).
Compounding: Like Naval Ravikant says “All the real benefits in life come from compound interest”. It certainly works well in relation to money and wealth creation. I also think that compounding works in education, self-improvement, career and the like.
When I started my journey in finance and investments, I didn’t know the difference between stocks and bonds. I started reading some basic articles and books and the more I read on the subject the faster I was learning, I was able to upgrade to complex concepts quicker than the last one.