Posts filed under “Rules”

Are You Trying to Get Rich — Or Stay Rich?

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

Random Thoughts: Comebacks, Intraday Reversals and the like

Since it is a Friday before a 3 day holiday weekend, it is a good time to kick back and think about what the recent market action might (or might not) mean. • Most Day-to-day market action is noise, There is very little signal involved, with the vast majority of commentary simply after-the-fact rationalizations of…Read More

Category: Investing, Markets, Psychology, Rules, Sentiment, Technical Analysis

Bernard Baruch: 10 Rules of Investing

“Being so skeptical about the usefulness of advice, I have been reluctant to lay down any ‘rules’ or guidelines on how to invest or speculate wisely. Still, there are a number of things I have learned from my own experience which might be worth listing for those who are able to muster the necessary self-discipline:…Read More

Category: Investing, Rules

Warren Buffett Investing Quotes

Given that its the Berkshire annual meeting this weekend, now is as good a time to roll out these quotes from Warren himself:   “To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of…Read More

Category: Investing, Rules

The Fine Art of Being Worng Wrong

  “We are in the business of making mistakes. The only difference between the winners and the losers is that the winners make small mistakes, while the losers make big mistakes.” -Ned Davis “More than anything else, what differentiates people who live up to their potential from those who don’t is a willingness to look…Read More

Category: Apprenticed Investor, Psychology, Rules, Trading

Sell Out: “The Other Side”

  Reader:  “Is it just me or has Barry Ritzholtz gone over to the other side. I see him guest hosting Bloomberg more so maybe it just goes with the territory….I’m dismayed and don’t like it when these guys sell out. Roger Lowenstein and his article on Bernanke….in Atlantic Monthly. Just venting………” Fleckenstein: Lowenstein, who…Read More

Category: Gold & Precious Metals, Psychology, Really, really bad calls, Rules

Sell Out: "The Other Side"

  Reader:  “Is it just me or has Barry Ritzholtz gone over to the other side. I see him guest hosting Bloomberg more so maybe it just goes with the territory….I’m dismayed and don’t like it when these guys sell out. Roger Lowenstein and his article on Bernanke….in Atlantic Monthly. Just venting………” Fleckenstein: Lowenstein, who…Read More

Category: Gold & Precious Metals, Psychology, Really, really bad calls, Rules

Gerald Loeb’s Market Wisdom

Gerald Loeb was a founding partner of E.F. Hutton & Co. He was the author of the books The Battle For Investment Survival and The Battle For Stock Market Profits. Following the 1929 crash, Forbes magazine called Loeb “the most quoted man on Wall Street.” Via Ivan Hoff, today we look at the rules which…Read More

Category: Investing, Rules

Gerald Loeb's Market Wisdom

Gerald Loeb was a founding partner of E.F. Hutton & Co. He was the author of the books The Battle For Investment Survival and The Battle For Stock Market Profits. Following the 1929 crash, Forbes magazine called Loeb “the most quoted man on Wall Street.” Via Ivan Hoff, today we look at the rules which…Read More

Category: Investing, Rules

12 Rules of Goldbuggery

Yesterday morning, I mentioned the extent of cognitive dissonance surrounding the Gold was surprising (What Are Gold’s Fundamentals?). The reaction to Gold’s crash has produced some astonishing rationalizations. The refusal to acknowledge basic trading facts leads us to recognize that Gold bugs and traders have very specific rules that they MUST follow. These social conventions…Read More

Category: Gold & Precious Metals, Humor, Psychology, Rules, Valuation