Last week, Bloomberg caused a minor stir with their story on C/NET founder Halsey Minor (How Halsey Minor Blew Tech Fortune on Way to Bankruptcy):

“How do you sell the technology company you founded for $1.8 billion and five years later file for personal bankruptcy? For Halsey Minor, it may have been a fascination with houses, hotels, horses and art.”

This tale of foolishness and excess is worth discussing, if for no other reason it is strewn with lessons for others. Not just for dot com millionaires, but for anyone else who suddenly finds themselves with much more money they had the prior year. This goes for professional athletes, entrepreneurs, actors, rock stars and lottery winners. Even those kids of baby boomers who find themselves with a minor inheritance can find lessons to learn from Halsey’s follies.

The key is recognizing that your new found wealth is not an ongoing revenue stream, but more typically reflects a one time (or short term) windfall.

Why is that? Because you never not know what the future holds. Post IPO stock prices can falter, athletes suffer from career ending injuries, artists may be one hit wonders. An old Yiddish proverb states “Man plans and God laughs.”

How do you plan and not tickle the funny bone of major deities? Be aware of what I call The Fallacy of Competency Transference. This occurs when someone successful in one field jumps in to another and fails miserably. The most widely known example is Michael Jordan, the greatest basketball player the game has ever known, deciding he was also a baseball player. He was a .200 minor league hitter.

I have had repeated conversations with Medical Doctors about this: They are extremely intelligent accomplished people who often assume they can do well in markets. (After all, they conquered what I consider a much more challenging field of medicine).

The problem they run into is that competency transference. After 4 years of college (mostly focused on pre-med courses), they spend 4 years in Medical school; another year as an Interns, then as many as 8 years in Residency. Specialized fields may require training beyond residency, tacking on another 1-3 years. This process is at least 12, and as many as 20 years (if we include Board certification).

What I try to explain to these highly educated, highly intelligent people is that they absolutely can achieve the same success in markets that they have as medical professionals — they just have to put the requisite time in, immersing themselves in finance (like they did in medicine) for a decade or so. It is usually around this moment that the light bulb goes off, and the cause of prior mediocre performance becomes understood.

Which brings us back to Halsey Minor: Without the expertise, without putting the time in, without much more than capital, he jumped into 3 different fields he had little or no knowledge of:

1. He became an Angel Investor, pouring money into early-stage startups and incubators and other such technology investments that eventually cost him a huge chunk of capital;
2. He went on a mad shopping spree for real estate, high-end art and contemporary designer furniture, “investing” tens of millions of dollars;
3. He purchased an immense Virginia Plantation where he planned to raise racehorses;

All of these purchases were eventually unwound at a fraction of their original purchase price in order to pay off creditors.

Which leads us directly to a few rules about dealing with sudden wealth:

1. You must avoid the hubris and arrogance that often accompanies sudden wealth. (Becoming wealthier does not = acquiring more expertise);

2. Debt is a dangerous tool, especially in the hands of the naive;

3. Assets are not the same as income; wealth is not the same as cash flow; Spending is not the same as investing;

4. You best understand your own strengths and weaknesses; this includes emotional, intellectual as well as behavioral.

5. Experience teaches us that the belief “I’m rich, therefore I must be very smart” is a recipe for disaster when not backed up with actual knowledge in relevant fields.

There are many more rules we can derive from this tale of woe, but perhaps the single most important one is the importance of living within your means. This is true whether you have $500 in the bank or $500 million.

Insolvency occurs when your liabilities exceed your assets and cash flow, regardless of how many zeros are on either side of the balance sheet . . .

 

 

Source:
How Halsey Minor Blew Tech Fortune on Way to Bankruptcy
Dawn McCarty & Ari Levy
Bloomberg May 31, 2013
http://www.bloomberg.com/news/2013-05-30/cnet-founder-minor-files-for-bankruptcy-after-selling-art.html

Category: Rules, Wages & Income, Wealth Management

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

39 Responses to “Are You Trying to Get Rich — Or Stay Rich?”

  1. rd says:

    William Bernstein is the classic case of a doctor putting the time in to understand finance….and then concluding that he still wouldn’t be able to beat the traders regularly.Sso his books are good treatises on asset diversification using index funds with an eye on the long-game (lifetime range).

    I have daughters, so for years there was always a Jane Austen movie playing in the background somewhere in the house. One of the concepts that stuck with me was the description of wealth. They invariably spoke of people as being worth X pounds PER YEAR. They might mention the big estate etc. but that didn’t mean much if the person or family was a poor manager and couldn’t convert it to income. Getting into excess debt due to gambling etc. was even worse than being a drunkard. Some of the long-term income generation issues also came through in the last season of Downton Abbey.

    It was an interesting gambit recently when Obama threw out the cap on total 401k and IRA dollars. What was even more interesting was the rational for the $3 million amount. They converted it to an annuity worth $205,000 per year and that was the basis for the $3 million. I don’t think many people were paying attention to how much money it took to generate $205k per year, but they should. Using income rates of about 2% to 6% (range of living off dividends-interest only to complete conversion to annuities), gives a much more realistic valuation of retirement savings than focusing on the big lump sum sitting in the bank account.

  2. Iamthe50percent says:

    Excellent. Just Excellent. “Man plans and God laughs” I think I’ll have a plaque made up with that.

  3. JoseOle says:

    Two other examples of competencies failing to transfer come to mind. Jordan is a terrible NBA executive; Ron Johnson was a terrible retailer of women’s clothing.

  4. [...] For some people, getting rich is much easier than staying rich. (TBP) [...]

  5. VennData says:

    In the tale of “Stay Rich or Die Tryin’”one wonders how well off the others would be who buy those Virginia Horse plantations on the cheap et al without the goofs who turn to BK courts to save themselves a few scraps?

    This just shows the luck involved. The GOP meme, “Job Creators” is losing its luster as they lose their tax breaks and the economy miraculously continues to grow due to the hard work regular folks do. Regular folks with higher rates I might add.

  6. carchamp1 says:

    It’s hard to replicate being in the right place at the right time.

  7. louiswi says:

    A great post Barry and great comments as well! The whole thing should be turned into a plaque and given to anyone enjoying prosperity whether earned or lucked in to.

  8. BennyProfane says:

    I’ll have to remember this when I suddenly run into a billion down the line.

    • or if you inherit a few $1000 dollars — the principles are the same, the number of zeros vary.

      • BennyProfane says:

        My meager inheritance went to a down payment on a co-op and a few years of mortgage payments for it. The ex got it in the divorce, so, yeah, I guess I screwed that one up.

      • You purchased the RE with proceeds of an inheritance, in most states, thats individual (not marital) property.

        (You had a shitty lawyer)

      • BennyProfane says:

        Oh, no. I just wanted to be rid of that woman. She got the apartment, I kept my retirement savings. In the end, it was worth it. I wasn’t going to blow my future retirement savings on a better lawyer through the long, stupid fights I see others get tangled up in.

      • LOL Understood

        Good on ya

      • carchamp1 says:

        Benny was probably faced with giving up the property or something else, like maybe a business, that was more important to him.

        Anyway, the number 1 way for men to get rich and stay that way is to not get married. Marriage is easily the surest way to financial ruin for men … and there’s no upside. And people wonder why men don’t want to “commit” anymore.

      • ugnaut says:

        Except that in 40% of households women are the breadwinners. My wife makes 100% more then me in her executive role, but she doesn’t want to be bothered with money or running the household. That’s were I come in. Our networth is more than 10x what it was ten years ago. Thanks In part to this blog.

  9. Rowan says:

    I had my own experience of this, minor inheritance, about 15 years ago. Luckily it didn’t take too many lessons to realize my skill set at the time wasn’t remotely transferable to managing/investing hard cash. So I had to try and learn. And about a million laughably unlearnt mistakes later I’m somewhat poorer and not much wiser.

    My school didn’t teach me about money and how to understand its effect on everything from your own emotions through to the myriad of options it opens up, let alone basic, sensible common sense investment strategies. it seems like a smart way to spend an hour a week when you’re young.

    Perhaps there should be a government programme that ensures at the time of inheritance taxation the recipient receives a handy little guide to not immediately losing it all.

    Ultimately, however, it seems to me the ability to handle money (earned and unexpected) appears to be more a reflection of own character and personality than ‘what we know’.

  10. capitalistic says:

    I am not sure why this is a surprise. The same goes for “sophisticated investors” with “sophisticated strategies”.

    It’s the Effortless Perfection Conundrum: “He makes it look so easy, therefore he’s right.”

  11. Hammer of Thor says:

    This is a tangent and is not meant to contradict your overall point, but you should read more into Michael Jordan’s baseball stint. I saw a documentary on it that included interviews from his minor league coach (Terry Francona) who said he was very impressed that someone who had not played baseball for over 10 years was able to even hit the ball on the AA level, and that he was improving throughout 1994. He batted .252 in the Arizona fall league in 1994 against many of the top prospects in baseball. A big reason he left was the strike that didn’t end until March 28th 1995.

    • I doubt he was at all impressed that he was coaching MICHAEL FUCKING JORDAN as a baseball player.

    • BennyProfane says:

      He was 31 years old in 1994. Now, I know we’re talking about MFJ here, but, never in the history of baseball has a 31 year old .254 hitter (no field, btw, although he could probably scale a wall or two if he had to) impressed any scout at an AA game. And, you know, there were a ton of people pulling for him, especially the ones who would make tons of money from the marquee value alone of him just showing up at a major league park. Just wasn’t going to happen.
      Now, Bo Jackson, on the other hand………..

      • TheGhostOfGriffinMill says:

        Another more recent example is Curt Schilling. He loved baseball. He won three World Series. He loved to play video games. Ergo, he decided he could MAKE a great video game. Sunk all his money into a venture that has the same rough failure rate as restaurants and lost it all. Really sad but not shocking to anyone outside his own internal echo-chamber.

  12. slowkarma says:

    I was working for a newspaper in 1990 when I came into some money. One of the guys in the business department heard about it and gave me a business card for an accountant/financial manager and insisted I make an appointment. I did, and her questions (not even her recommendations) convinced me that I didn’t know a f****** thing about money. I let her set me up with Fidelity and Vanguard, and a retirement account, and never looked back. (I would have put it in my checking account.) I’ve tried to learn about money since, but nothing I’ve learned has changed my direction.

    Although, I’m a fairly serious golfer, and the people at a golf course I once patronized tried to sell it to me. I had the cash, and I was thinking about it, and went to get a haircut from a guy who is another low-handicapper, and he said, “Slow, you don’t know a goddamned thing about running a golf course. You’ll lose your shirt.” It took about a nanosecond to realize that he was right, so I’ve never owned a golf course.

    As Mick would say, there are some things you want and some things you need, and they are not necessarily the same. But boy, the *want* can blind you.

    • rd says:

      There is an old adage in horse breeding that it is easy for a newcomer to make a small fortune at it. They just need to start with a large fortune.

      • Thats how Trump made a small fortune in NYC Real estate: HE started with a large fortune and pissed it away on Eastern European bimbos and Atlantic City Casinos

      • carchamp1 says:

        Yet another opportunity to warn men against the legalized looting we know as marriage. Thanks Barry.

  13. Disinfectant says:

    The interesting thing is not that young people who suddenly come into money end up blowing it on bad investments and property. The interesting thing is that supposedly competent creditors lend them the money to make matters even worse. Lack of skin in the game in the lending business is a perpetual problem.

  14. mrthinks says:

    I thought about winning the lottery, what I would do…
    I came up with a plan (possibly deity chuckle inducing)
    1. I would hire a lawyer and an accountant.
    2. Get someone else to claim the ticket and take a smaller lumpsum (use lawyer to make that happen).
    – No one knows I won the lottery, even though I did.
    3. Put that lumpsum into an account of some kind that would generate interest.
    -I was thinking along the lines of a simple CD, just lock the lumpsum out of my hands. I know millions in a CD sounds silly, but it’s the concept, not the actual product.
    for a theoretical win of 50 million, I could pay the ‘mark’ 10 million, put the 40 million into an account that generates >1% interest. (1% is $40,000) I live on 40k/yr now. The interest generated over 1% gets re-invested. Done.

  15. Joe says:

    One of the more interesting aspects of the whole sudden wealth riff is that monetary magnitudes outside of an individual’s experience become divorced from reality. On the one hand, you have an individual with a modest or a more successful lifestyle who can more or less successfully budget their existence. Put a seemingly large amount of money in their hands and it becomes inexhaustible. Anumeracy and conceptual anumeracy lead to the “I CAN”T be out of money” moment.

    Years ago I heard a story that revolved around a wealthy man with one of the brand new and very rare at the tine Ferrari Testa Rosa’s and what it meant to him. It was a great story, but I did some math to quantify some of the details. To have had the Ferrari in the first place would taken the entirety of the yearly allocation of a $5,000,000 winning lottery ticket. It put a magnitude on whether or not winning the lottery would make you wealthy.

  16. kcowan says:

    It is amazing how many people think I should become an angel investor. I say: “What is it? Do I just look stupid or gullible?” I was good at certain things. I even attended some angel meetings. I said: “What do you want from me?” They said: “You can assess whether their ideas/products are sound!”

    So what. That has little to do with their potential commercial success…

  17. bonghiteric says:

    A public company acquired the company I founded. While I experienced a windfall it wasn’t without a couple hiccups, call these “privilege problems” because 97% of the rest of the population wouldn’t mind having them. As a major shareholder I was in lockup when Jim Cramer took a shine to the acquiring company (featured the CEO on his show a couple quarters) and ran the stock from low single digits to just shy of $10. That looked great on paper but by the time I could divest my shares it had round-tripped. There was ample opportunity to use those paper gains as leverage but I didn’t which was lucky. In transactions of this type there is holdback of a certain % of stock in escrow to ensure there are no o/s claims against the acquired company. In our case there was. So another chunk of stock was tied up for two years after the acquisition and only about 60% was eventually released to the shareholders after a settlement. Then there was an issue with options accounting. I was granted options with a 10-yr window to exercise and I had done so in a cashless exercise well before the companies entered into m&a talks. The catch for me, however, was I hadn’t been operationally involved in the company for several years which means the common stock I converted into was taxed at the ord income rate rather than capital gains which is how I reported it so I had to pay the offset in addition to taxes on disposition of the shares. That was a chunk of change that came as a bit of a surprise.

    There is no handbook for negotiating some of these things. It was very frustrating not being able to settle on one figure (the gross worth) for several years. It made budgeting and tax and college planning difficult. I also worked in an upper-mid management position at a large corporation for over a year after the deal closed and would often have to duck out to my car to argue with the Stock Transfer Company (another issue) or an attorney so nobody at my job would catch on. The point of this missive is it is hard work to handle a windfall (I didn’t get FU money but it wasn’t far off) and if you’re not used to it or don’t run in a moneyed circle (I didn’t, but Halsey def did) there is ample opportunity to fuck it up.

  18. ricecake says:

    “Are You Trying to Get Rich — Or Stay Rich?”

    Neither!

    Just work and make honest living and getting ready to be retired reasonably comfortable.

    Saving like mad now and not invest because it’s way too confusing out there. Just keeping pray and hope that there will be no inflation because my retirement savings will not be able to afford that.

    • BennyProfane says:

      That’s been my selfish mantra. Bring on deflation. Alas, that isn’t happening. Yet.

  19. streeteye says:

    The Halsey Minor story is beyond overconfidence and hubris. It’s not like he lost the money by just getting in over his head in risky ventures, or didn’t have the background and got ripped off like a pro athlete. He was a CEO who took his company public. And then he blew it on art, mansions, jets, and acted self-destructively in his business and relationships. How do you spend $80m on mansions when you were worth, post-divorce, maybe $200m? And then your bank pulls the plug when it sees you want to buy a $60m jet? Sometimes you have to be a little mental and sociopathic and narcisstic to get something big off the ground and then you hit the wall.

    http://upstart.bizjournals.com/executives/features/2008/09/18/CNET-Founder-Halsey-Minor-Profile.html?page=all

  20. ashpelham2 says:

    One of the best, short reads in quite some time, for me. The whole thing can be inadequately summed by the phrase “easy come, easy go.”

    Another takeaway is the “Advice” that newly wealthy people with no education or experience sometimes get. It’s almost as if fools and their money are TOO easy to be separated, and maybe it’s supposed to be that way. When you’ve had to work for that money, and fight to save the pennies, you are much more careful with whom you consider advice from. In my business, the company I work for hires a lot of young execs to advise customers on what to do with their wealth. Our smarter customers realize it’s only an opinion being expressed, and do their own soul-searching and research. I detest when someone simply takes me at my word because of which side of the desk I sit on.

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