By: Ryan P. Dolan
“We have been students of other’s folly, and it has served us well. I’ve often felt there might be more to be gained by studying business failures than business successes. We try to study where people go astray, and why things don’t work.”
Warren Buffett
“Pride goes before destruction…”
Proverbs 16:18
We live in a success-obsessed culture. Charlie Munger has said that most of the questions he gets boil down to some version of “How do I become like you, except faster?” Without question, there is value in studying success. However, there may be more value in studying failure. Why? First, the unique traits of the hyper-successful are often difficult to emulate. Yes, you can read more or get up earlier, or work harder. But, ultimately, you likely don’t have the capacity to invest like Warren Buffett, or the vision to build a company like Jeff Bezos. However, we are all very susceptible to the causes of financial failure. Second, most “success” proves short-lived and ephemeral. While achieving short-term financial success is fairly common, long-term sustained financial success is quite rare. Live long enough, and you will see some amazing turns in fortunes. So, study success-but make sure you focus on long-term, sustained success. And be sure to study failure, and look for commonalities and themes.
While it is preferable to learn as much about financial failure vicariously, inevitably we have financial failures of our own. Nobody likes admitting they are wrong, but doing periodic post-mortems on errors in our own judgment is a first step in attempting to not repeat them in the future. You will learn much more from your financial missteps than your greatest hits.
I’ve named this series “The Icarus Files” after the tragic Greek character who soared on wings of wax, only to fall back to earth in shame and ignominy when his wax wings melted as he climbed too close to the sun. In the first post in this series, I detailed the meteoric rise and tragic fall of natural gas pioneer Aubrey McClendon, the brash and brilliant founder of Chesapeake Energy. McClendon built a personal fortune of $2 billion on the back of his unshakeable faith in fracking and natural gas. For a decade or more, McClendon’s bold acquisitions of natural gas reserves and huge investments in fracking equipment were extremely successful.
McClendon’s unquenchable thirst for “more,” more wealth, more power, more growth led him to take on astounding levels of corporate and personal debt to finance even more growth. As so often happens, success seemed to inflame his self-belief and led him to take progressively larger financial risks. McClendon had so much faith in Chesapeake, that instead of selling shares to finance his prodigious lifestyle or pay down debts, he borrowed heavily against his stockholdings. He seemed incapable of asking that crucial question: “What if I’m wrong?” He seemingly refused to consider the ramifications of a fall in the price of natural gas or Chesapeake stock price.
And yet, the collapse of natural gas crushed the values of McClendon’s concentrated investments and assets, and caused a cascade of margin calls and the eventual forced sales of assets into an already distressed market. With almost unbelievable speed, the vast majority of McClendon’s wealth, built over twenty years, was vaporized.
In this post, the focus is Brazilian Eike Batista. Batista burst on the international financial scene in 2005, and embodied a new type of swashbuckling emerging market entrepreneur, with a refreshing level of bravado and ambition. Batista was the son of a very prominent and beloved Brazilian, Eliezer Batista, the long-time head of Brazil’s state-owned mining assets, a major component of Brazilian wealth. Later, when these assets were privatized, Eliezer led the new company, Vale. What’s clear in reading about Batista, is that he had a competitive relationship with his father, always striving to earn-and never quite getting-his respect.
Batista, with a considerable chip on his shoulder, set out to forge his own identity and financial success. He spent the first decade of his career building a fortune in gold mining and gold speculation, with hair raising gains and losses along the way. From the beginning, he outlandishly vowed to become the richest man in Brazil. Batista parlayed his early success by trying to vertically integrate Brazil’s commodity export industry. China was a ravenous consumer of commodities, and Batista was determined to build an empire to search for, excavate and ship commodities. Batista seemed to be perfectly positioned to ride the surge in commodity prices, Brazil’s stock market, and the China growth story.
Batista IPOd an alphabet soup of companies, such as EBX, OGX and MPX, all unprofitable. Investor interest was whipped up by Batista’s extremely promotional financial projections for growth and future profitability. By 2011, Batista was worth $30B-the seventh wealthiest man in the world. He appeared on Charlie Rose and when asked about his future ambitions he stated bluntly: “A hundred billion dollars.” He lived an ostentatious lifestyle, remarried to a much younger Brazilian model, and was prone to garish materialism, such as displaying a McClaren sports car in his living room.
Fast forward 3 years to 2014. Batista’s corporate empire lay in smoldering ruins, and his personal fortune completely incinerated. Commodities, Brazil's stock market and currency had all collapsed. The boom had turned to bust. Overambitious corporate strategies, overleveraged balance sheets, and signs of outright fraud were beginning to come to light. By 2017 Batista was serving jail time for bribery, money laundering, insider trading and misleading investors. The McClaren was repossessed.
There are many financial lessons to be learned from the Batista story. Here are three:
Don’t let psychological hang-ups or flawed goals drive you; define a sound vision of success:
You don’t have to be much of an armchair psychologist to see that Batista’s relationship with his father, and the desire to prove him wrong or earn his respect was a major catalyst in his quest for accomplishment and wealth. Ultimately, you need to understand and make peace with your own past and insecurities if you want to sustainably succeed. I’ve seen many “successful” people lead unfulfilled lives this way.
There was never enough money, accomplishment, power and fame to appease Batista. All of it served no purpose than to aggrandize his own ego. This is an incredibly unstable foundation for long-term financial success. At the heart of all Icarus stories is raging insecurity and flawed goals.
It’s harder to sustain a fortune than to make it in the first place:
Batista seemed incapable of understanding that the traits and attributes which allowed him to build his fortune were not the same ones that would allow him to keep it. The bravado, self-assurance and audacious risk-taking which drove early success must be tempered with increased humility and balance over time if it is to be sustained. This is very hard to do when you’ve been on a protracted hot streak and your ego and self-belief are raging. You have to be humble to ask “What if I’m wrong?” Batista clearly didn’t have the ability to do that.
Batista just kept pushing all his chips back on the craps table, out of sheer arrogance. He won big for years, but at the end, lost it all-including his dignity.
Don’t confuse brains with a bull market:
Financial history is littered with tales of people who built huge fortunes in bull markets, only to get thrown over the waterfall in the subsequent bust. A trait I work to strengthen in client’s is emotional ballast. In good times, it’s imperative not to buy your own BS. Yes, you’ve worked hard and are talented, but if you’re honest, you’ve also likely had the wind at your back. In bad times, you need to have faith in your worth and have confidence in the future, even in the face of withering current conditions.
Life is cyclical and unpredictable. We are all on the great, turning wheel of fortune, and every life has its share of good times and bad times. It’s critical not to continually extrapolate the recent past into the future, and build a degree of emotional and financial contrarianism.
About Dolan Partners:
Dolan Partners is a holistic financial life planning and investment management firm, working hand in hand with professionals and business owners. We dive deeply into clients' financial lives, working to align their money with their unique vision, values and goals.
We offer complimentary introductory calls with prospective clients, which are always completely confidential and judgment-free.
Learn more at www.dolanpartners.com
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