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The Wisdom of Finance Summary – April 2022

Author: Mihir Desai

Short Summary
The Wisdom of Finance (2017) distills complex financial principles into simple rules that we can apply to our own lives. It is a practical guide to financial self-sufficiency when you are starting your business. The book also includes a collection of simple techniques and strategies that will help you to find out where are you now and create a plan for the future.
the wisdom of finance
Source: amazon.com

Detailed Summary

Many people blame the economic recession occurring in the U.S. on the collapse of the housing bubble that began and burst in 2008. With the subsequent collapse of financial institutions, unemployment, and a declining market economy, the crisis that faced the world was almost as if it were following directly from the plot of a great novel. Several books have emerged that describe various aspects of this crisis. Here we will look from the perspective of financial analysis.

We don’t have the luxury of the Federal Reserve System to print more money, so we must rely on other options. One solution is to act more responsibly and know when to spend and save. The following lessons from The wisdom of finance is important for every individual who wants to learn some finance wisdom.

The Wisdom of Finance Key Points

Look for diversification when investing

When it comes to diversifying your money, there are multiple ways to invest with your savings. You can put money into stocks and bonds, real estate, or even commodities. But you should also diversify your thoughts and opinions, and in this case, books.

Although investing has been on the rise in the past few decades, there is still a lack of diversity in the industry. Statistically, about 90% of investors are male and over 50% are white. Largely, this is because many people believe that it takes a high amount of knowledge to start investing, but it is very easy and accessible to anyone willing to learn. Anybody can start an investment account with as little as $1 if they want to.

Mihir Desai tells the reader that the only way to avoid making a foolish decision about your future is to make sure you’ve got your money spread across multiple options and companies. The wisdom of this advice becomes evident when you buy a stock that goes down in value. It happens.

This also means that when you take Mihir’s advice and spread your money across several stocks, you’ll see a return on investment as some stocks rise and others fall.

Diversification in the people you work with is also an important aspect of success. There are three types of people:

  • High beta people: Risky but have the potential to gain
  • Low beta people: Keep you safe but have no potential
  • Negative beta people: Keep you stable in problems but don’t increase the worth

Financial mergers are no different than relationships:

Financial mergers are no different. When considering a merger, the key is to look for things that will come between you in the long run. And by ‘merger,’ I’m not talking about a business’s-only transaction. I’m talking about combining all the elements of your life that you want to be available to you over the next 40 years: spouse, family, friends, community, etc.

When it comes to financial decisions, it’s important to take the same approach. Before you sign on the dotted line, spend time thinking about whether you’ll be able to say yes to a joint credit card, mortgage, or even a loan shark in the future.

Relationships and financial mergers have more in common than you might think. For example, financial experts tell us that the most important thing you can do if you are planning a merger is to get along with your business partner. If you’re not going to be friends, you’re probably not going to have a successful business deal. How often have we seen this play out, time and time again? We’ve all heard the horror stories of business deals gone wrong. The same holds for relationships. If your relationship isn’t working, the best thing you can do is cut your losses and move on.

According to a relationship expert, it’s so important to be on the same page when it comes to goals, dreams, and values that she says to err on the side of caution when dating and break up before marriage if there’s not a good fit. So often when I speak with people who are in long-term relationships or marriages that just aren’t working, the problem is not money (in fact many of them are living comfortably).

It’s the concern that having a divorce on their resume will somehow hurt their career prospects or damage their social standing. The irony is that if they stay in a bad relationship, it actually could hurt their career as well as their social standing. The person who has a successful relationship or business deal has learned how to communicate effectively and make compromises. They know how to trust each other and respect each other’s feelings and opinions.

You have to borrow money to invest if you don’t have and the same applies to life

It’s always better to have an education, but that doesn’t mean it has to be free. And it especially doesn’t have to be free if you can take on debt and make an investment in yourself.

But what happens if your startup or education goes south? If you’re in too deep and can’t pay your debt, you could essentially lose everything. While it’s possible to start a business with no cash, you can’t do the same with your investments in life, such as your education or a new career.

Our lives and businesses have ups and downs, but the level of risk involved can be the same for both. Ideally, you want to grow without taking on excessive debt and without taking unnecessary risks. If a loan or investment is going to result in an unexpected loss, it might not be worth the risk.

Same as when you are starting up a business, you have to borrow money to invest in something that you hope will one day pay off. It’s like a payday loan, things take time to develop and a business should not be rushed or forced to the next level because of debt. Paying off debt is often painful but worse is never getting anything in return. 

The Wisdom of Finance Quotes

“We should experience as much as possible—just as insurance companies must—to make good decisions and understand the world with the right probabilities.”  Mihir Desai

“Finance’s starting point in valuation is that previous accomplishments and what you have today bear little relationship to real value. Finance is completely and ruthlessly forward-looking. The only source of value today is the future.”  Mihir Desai

The Wisdom of Finance Review

Some analogies are fascinating because most of us never thoughts finance is the same as life. If you want to know finance from this perspective then this is a book for you. Overall, It was a good read.

To whom I would recommend The Wisdom of Finance summary?

  • Anyone who wants to know how money can improve our life.
  • Whoever wants to start his business or invest somewhere.
  • Anyone who wants to learn to finance in a better way.

Link: https://amzn.to/3vqazBV