By Ryan Dolan
“Sir John Templeton said something to me and it stuck in my mind...We were on a roll of fifteen wonderful years. He said…’Always change a winning game.’ I didn’t do it because I was on a roll then and wasn’t flexible enough.”
Peter Cundill
Adapted from a true story:
The stock market is booming. Facebook, cocktail parties, the sidelines of your kids’ sporting event: everyone’s talking about it. An individual looks at his portfolio with a mixture of elation and disbelief. After a decade of consistent savings and heady investment returns, his once humble portfolio has just surpassed a big round number. A life-changing number. Perhaps not a “quit work and retire to the south of France” number, but enough to potentially provide decades of financial security and independence for his family, if properly managed.
Starting out, he had very little assets and no familiarity with investing-though at the time, it hardly seemed to matter. Now, though the assets have grown, and his investment results have been good, he’s still not much more knowledgeable than before. If he’s totally candid, he’s gotten a bit lucky. This realization has created more than a little anxiety and fear. The financial stakes have been seriously raised. This is real money now-with real consequences.
He’s also concerned about the market. Many around him, with little experience or effort, are making large profits in the market and living large. It all seems too much. After some deliberation, and eager to shed his building anxiety, he abruptly sells everything-liquidates his entire portfolio-he’s left with $9 million in cash.
His timing proves impeccable. The market begins an immediate cascade which quickly turns into a rout. A year passes and the economy is reeling with seemingly no bottom in sight and the stock market is down a staggering 50%. All the greed, speculation and exuberance have been abruptly swept away. Pessimism and despair abound.
Our protagonist almost can’t believe his luck. He profited mightily during the bull market and sold out right at the top! Everyone else appears to have gone into the crash on their front foot: overleveraged, overexposed, full of optimism. There is no liquidity-nobody has any cash. Banks are either suspending withdrawals or drastically limiting them. Small banks are failing across the country. And yet here he sits with a massive pile of glorious cash.
Almost in spite of himself, he has a yearning to jump back in. He’s gained increasing faith and conviction in his investing-his clairvoyance. He envisions buying at the market bottom and multiplying his wealth to truly big money. “Be greedy when others are fearful,” as the saying goes. He plunges back in-loading up on stocks. All $9 million. His dividend income alone is a staggering $500,000 a year.
So, how did the story play out?
The investor wasn’t making these decisions during the last great bear market, the 2007-2009 financial crisis. Had he been, these actions (selling in late 2007, buying in late 2008) would most likely have resulted in stupendous gains. The $9 million could easily have become $20 million, $30 million or more by now. Unfortunately, for this investor, he was operating in the greatest wealth incinerator in American financial history: the Great Depression. After selling out in 1929, he jumped back in 1930, well before the ultimate market low in 1932. Within a year his $9 million dollar portfolio (adjusted to today’s dollars) was worth less than $2 million and his dividend income was cut to virtually nothing. It’s almost hard to fathom buying stocks down 50% only to see them marked down 80% from there. But that’s what happened. Many stocks went to zero.
This unfortunate story is from “The Great Depression: A Diary,” by Benjamin Roth. The Depression was such a violent and extended financial and economic collapse, that virtually no one emerged unscathed. What surprised me wasn’t the people who got carried away by greed only to experience financial ruin. It also wasn’t the non-investors-everyday people who were crushed by joblessness and poverty. I knew those stories.
Rather, it was the many stories of individuals Roth personally knew who, through good fortune or financial clairvoyance, found themselves just prior to the 1929 market peak both very wealthy and very liquid. People who had sold businesses, or received a large inheritance or had completely exited the stock market. And yet many, if not most, still managed to lose it all by making a host of financial and investment mistakes. Those stories surprised me.
Which brings me to my point, Which is harder: building wealth in the first place or keeping it? Getting there or staying there? While both present their unique challenges, I contend that sustaining wealth is far more difficult. I don’t think it’s close. Why? Ultimately, while there are really only a handful of paths to building wealth, the number of ways to lose it are innumerable. Landmines are everywhere. Often, lost wealth comes down to unforced errors.
Live long enough and you start to see this validated. I have known many people who at one time had built meaningful (for them) wealth. Given enough time, most (60-80%?) were unable to sustain. The majority didn’t necessarily blow up in spectacular fashion (though a few certainly did that). Rather, they experienced a slow, relentless decline in financial security and lifestyle. A decade or two later, their financial condition had deteriorated meaningfully. In many ways, these people were the most unhappy. Regret, and a sense of what could have been, of missed opportunities, haunt them.
We are currently in a period of significant wealth creation. Many people have accumulated meaningful assets over the last 5 and 10 years, many for the first time. If history is a guide, when the tide turns (and it always turns), many will learn some very old, very painful financial lessons.
How do you avoid this? A few thoughts:
You need humility. You may be feeling really validated and puffed up right now. Beware assuming your success is attributable only to you-your talent, hard work, ambition. Assume luck, good fortune, and a few good bounces had a good bit to do with it. Arrogance is a key vulnerability to sustaining wealth. You need to cultivate a healthy balance between self-confidence and humility. Make sure you have people around, people you trust, who can point this virus out when it appears.
You need patience. Sustaining wealth is a long-term game. Wealth creators tend to be impatient, action-oriented people. It’s what got them where they are. But what got you here won’t keep you here financially. You need someone who can help you develop these contrasting skills as it relates to your financial life. Really important.
You need to increasingly balance optimization with resiliency. We live in an optimization culture-one where decisions are made based on what could go right. Not a great mindset for sustaining wealth. You need to increasingly ask yourself “what if I’m wrong?” When you do so, your financial behaviors will better sustain what the future holds.
You've built some meaningful wealth. That’s great. Now start building the mindset, behaviors and tactics to sustain it.
About Dolan Partners:
Dolan Partners is a comprehensive financial life planning firm, working hand in hand with professionals and business owners. The mission: aligning clients’ 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