Seth Klarman is a legendary value investor.
He’s the billionaire co-founder and portfolio manager of Baupost Group, a private investment partnership based in Boston.
Perhaps what he’s best known for, though, is writing Margin of Safety.
It’s a legendary book on value investing, taking many of its cues and themes from the likes of Benjamin Graham and Warren Buffett. Its limited printing run, combined with its mythical status, have elevated its stature, mystique, demand, and… price.
For a book that promotes getting a good value, it’s a bit funny and bizarre that the book now goes for over $1,000 per copy.
Klarman is an articulate and thoughtful speaker, and I’ve always enjoyed hearing what he has to say on a variety of topics. He draws parallels to Buffett for good reason.
Investing Is The Intersection Of Economics And Psychology
One of his favorite themes to discuss as it relates to investing goes like this:
Investing is the intersection of economics and psychology.
This is a concept he teaches to students at Harvard Business school (he’s an alumnus).
It’s one of the most concise summations of investing I’ve ever heard of.
Indeed, there’s the economics portion of investing.
That involves the business analysis, leading you to conclusions and action after looking at the fundamentals, qualitative aspects, competitive advantages, risks, and valuation of a business.
But as Klarman will rightly note, the analysis is actually the easy part.
I think what he’s really saying here is, the economics is the easier side of this intersection.
It’s the psychology portion that is far more difficult to master.
This is because human beings are emotional creatures. Highly emotional. Maybe too highly emotional.
These emotions can be wonderful. They can make life worth living.
But they can also be detrimental, be it for investing or many other elements of life.
One can perform their analysis and conclude Stock X is worth ~$50. They see it priced at $45. They buy.
But then what happens when it drops to $40?
Questions are raised. Emotions are heightened. Mistakes are sometimes made.
Now, we could talk quite a bit about this concept as it relates to investing. Indeed, I’ve written a lot about the psychological elements of investing over the years, so I would feel like I’m retreading old ground here.
Instead, I want to talk about what Klarman is saying here as it relates to life – and how we can apply it to live better, happier, and more successful lives.
Life Is The Intersection Of Economics And Psychology
Klarman’s concept is a fantastic statement that tells you a lot about investing in just one statement.
Likewise, however, it’s a concise and accurate statement that can be applied to all of life.
Life is the intersection of economics and psychology.
The faster we recognize this, and the faster we can use this realization to our advantage, the better off we’ll be.
Money is obviously huge. It’s at the center of everything we do in our lives.
As they say, money makes the world go round. We literally can’t live without it in our modern-day society.
On the flip side of the coin, I’ve often written about how money isn’t terribly important as it relates to ongoing happiness.
However, that’s once you already have enough of it to get to a certain point in life.
Once you’re financially comfortable, increasing your money does not increase your happiness at a constant 1:1 ratio. In fact, it may actually work the opposite.
Money is funny. The people who have the most of it need it the least; the people who need it the most have the least of it.
The economics portion to life is important. Very important. That’s why this is where the intersection lies.
But it’s also just one of two major thoroughfares.
Moreover, like Klarman noted as it relates to investing, I believe the economics portion of life is actually the easier of the two to figure out.
As with anything, though, learning something requires building out your knowledge basis.
Ignorance breeds fear.
Knowledge is power.
And that’s why it’s so important to become knowledgeable about money. I’ve listed numerous resources that are fantastic for building up that foundation of knowledge, eliminating ignorance and fear.
Once you learn about money, you’ll see that it isn’t that hard to figure out. People make it way more complicated than it needs to be. Money is just pieces of paper (or “claim checks”, as Buffett calls it) that allow you to barter for life’s resources. It’s not magic.
You work hard, save what you can, intelligently invest, and build your wealth and passive income in the process. There are a few key principles to know and take advantage of, including compounding. There’s not much to it. Almost every self-made successful and wealthy person I’ve ever read about or personally met has more or less followed that simple recipe.
Look, I’m not the most successful guy around.
But following this recipe allowed me to become financially free at 33.
And I did this without a comfortable childhood, good family, college degree, or high-paying job.
I built out my FIRE Fund by working hard, living below my means, and investing my excess capital into high-quality dividend growth stocks at appealing valuations.
The FIRE Fund now generates the five-figure and growing passive dividend income I need to cover my essential expenses in life without needing a job.
I’m at a point in life in which I rarely think or worry about money at all anymore. I’m only in my mid-30s. And I didn’t start any of this until my late 20s. So it doesn’t take long to get in gear and lock the basics down.
However, it’s the psychology of life that’s much more difficult to master.
This is where things get harder.
I’ve interacted with a lot of people who are, or can become, financially successful.
Yet I’ve only come across a few people who are, or can become, successful across most other aspects of life.
They find the economics tactical and straightforward, but they can’t seem to get a good handle on the psychology of life.
Said another way, they can become fairly wealthy, but they can’t seem to become fairly happy.
Your net worth should never be conflated with self-worth.
Money won’t make a life for you. Money won’t jump out of your screen, grab you by the hand, and whisk you away into some fairy tale.
You have to build a life for yourself, not just a portfolio.
This is where the “three P’s” of FIRE come in.
No matter how much money you have, you’ll need to have passions, productivity, and progress in your life.
If you fail to have one, or all three, I’m confident that you’ll feel less fulfilled in your life.
Now, there’s no one right passion, or set of passions, for everyone.
The individualization of this is why the psychology element of life is much more difficult.
Money is universal and fungible. It’s a language we can all speak and understand. We all know what $100 means.
But living a happier and more fulfilled life, filled with passions, is something that’s as unique as DNA.
I believe it’s easier to find one’s passions than some make it out to be.
But it’s still an individual pursuit. Nobody can figure it out for you.
Love, especially, is profoundly indispensable as it relates to overall well-being, quality of life, and success. Warren Buffett has said that mutual love is the best measure of success. I’m inclined to agree.
You can outsource money management, but you can’t outsource life management.
Furthermore, there are major portions of our lives that are so incredibly important, yet have very little to do with money… at least at the surface.
At the surface, indeed. Money is always lurking.
Taking Advantage Of Economics To Help With Psychology
So Seth Klarman believes the economics portion of investing is easier than the psychology of it.
And I’m saying that belief translates well to the intersection of economics and psychology in life – the former is easier than the latter.
The good news is, we can use this to our advantage.
If we can figure out money fairly quickly, get a compounding snowball rolling as early and as fast as possible, we put ourselves in an advantageous position to allocate far more of our resources toward figuring out and bettering the majority of our lives that isn’t necessarily related to money.
Becoming a richer person is great.
Becoming a happier, smarter, fulfilled, loved, and well-rounded person is far greater (and more difficult).
Using the former to achieve the latter is what we must do.
Like I just noted, money is always lurking. Likewise, money can be used in a very powerful manner to our advantage.
For instance, the three most important things in life – time, love, and health – all share a commonality: they cannot be directly purchased.
However, all three of them can be improved and/or more accessible if we’ve figured out the economics part of the intersection.
FIRE, in particular, can put us in a great position as it relates to having more free time, enriched love, and improved health. There is absolutely no doubt whatsoever about this.
More time means more opportunities to learn and grow as people, which branches out to every other area of our lives.
Enriched love adds to our happiness and fulfillment as emotional creatures. It gives us the strength and support we need to move forward and experience what’s wonderful about life.
Improved health gives us the physical capabilities we need to do everything we must do. It empowers us and adds to our quality of life.
Seth Klarman is correct.
Investing is the intersection of economics and psychology.
But life, too, is the intersection of economics and psychology.
Like with investing, the economics is easier to figure out (and perhaps even master) than the pyschology.
The good news is that we can use economics as a platform from which to build our mastery of our individual psychologies.
Most people spend way too much time worrying and thinking about money. It’s such a waste.
This is why achieving FIRE is so important.
We can master our money and let that money go to work for us. This frees us up to work on ourselves as human beings – improving who we are and the world around us in the process.
What do you think? Is Klarman right? Is life, too, the intersection of economics and psychology? Do you believe the former is easier than the latter?
Thanks for reading.
Image courtesy of: lekkyjustdoit at FreeDigitalPhotos.net.
P.S. If you’d like to achieve FIRE, which could allow you to spend much more time bettering your life, check out some fantastic tools and services I personally used on my way to becoming financially free at 33!