By Ryan Dolan
We all love success, winners. As a society we celebrate them, study their stories and build narratives. Often these narratives can lead to flawed perceptions. It is a common narrative, for example, to assume rich people are, by definition, smart people. While in some cases financial success is a result of unique brilliance and skill, it is often more prosaic intelligence combined with hard work, favorable tailwinds, with a healthy dollop of timing and luck.
Another narrative is to assume rich people will stay rich. I’ve studied enough financial history, and witnessed first hand that far more people make a fortune than keep it. Over the last twenty years, despite being a time of large wealth creation, sustaining wealth seems to have grown more elusive. A book, “The High Beta Rich” details the growing ephemeral nature of today’s wealth.
We tend to judge performance and success, our own and others, on too short a timeline. As Charlie Munger is fond of saying (paraphrasing), “Don’t judge someone’s life as a success until they are dead.” The short-term ups and downs are mostly noise not signal. We can’t really determine how a person, or a portfolio, really did without a lot of observable data. Whether we want to accept it or not, over a long life we are all on a wheel of fortune, with its cyclical rhythms of tailwinds and headwinds, good runs and difficult ones. While some experience more volatility than others, none escape it. It is critical to understand, manage and plan for the inevitability of this, not naively think you can avoid it entirely.
What separates the few who build and sustain financial security and freedom from the many who flame or sputter out, is mindset. This mindset doesn’t depend on overwhelming genius-but it does take a healthy combination of wisdom, the right behaviors, drive and emotional intelligence. We need to understand our own wiring, blindspots, and biases-what we do well and what we don’t. We need emotional detachment and resiliency, to not get carried away in the good times while not despairing when misfortune strikes. It means never getting complacent, entitled, always growing, never letting your edge dull. We need patience. We need to tune out the noise. We need to focus on running our own race, competing primarily against our own potential and not neurotically comparing your financial lives to others. We need enough humility to avoid making a myriad of financial mistakes and unforced errors. We need sound partners who can keep us objective, focused on the big mission, and on path.
In that vein, it is a useful discipline to study mistakes, failures, and misjudgements-both our own and those of others. We need to review and assess our mistakes of commission (those errant actions we took) and importantly, mistakes of omission (right actions we should have taken, knew we should have taken-yet didn’t). Many of the best investors make studying their mistakes a key part of their process.
We also want to learn lessons from the mistakes of others-particularly those who have had a history of business and financial success. An example from just last year was the startling financial collapse of Archegos Capital and its founder, Bill Hwang. Archegos, a family office that managed Hwang’s personal fortune, looks to have vaporized perhaps as much as $20 billion in a matter of days. Hwang’s is a rags-to-riches-to-rags story that is worth studying.
The son of Korean immigrants, Hwang was an unlikely Wall Street billionaire. After working his way through college and business school, Hwang took a job as an institutional stock salesman for a second-tier firm. Hwang was a natural, and over time caught the ear of legendary investor Julian Robertson and was ultimately hired by Robertson’s firm Tiger Management. After a very strong 25 year run, Robertson and Tiger struggled mightily in the late 1990s bull market, and ultimately decided to return investor money and operate as a family office to manage Robertson’s fortune. Robertson himself stepped back from active management in 2002, and tasked six young proteges, all in their 20s and 30s, to run his money. Hwang was one of the now famous “Tiger cubs,” and focused on Asian stocks.
From 2001 to 2007 his fund, Tiger Asia, averaged 40% investment returns, and Hwang, at 44, was worth close to $1 billion.
And yet, success didn’t appear to go to his head. Hwang was well-regarded, affable, quiet and unassuming. He lived a fairly simple lifestyle, with little sign of personal extravagance. This personal austerity did not extend to his investing. From the beginning, he was known for his aggressive risk-taking and tolerance for volatility. At the same time, there were questions about Hwang’s integrity, such as his proclivity of engineering squeezes in certain heavily shorted stocks.
Amidst performance pressures following the financial crisis, Hwang appears to have let his ambition push him into overtly illegal activity. Investigated by US and Hong Kong regulators for 4 years, Hwang was ultimately convicted in 2012 of insider trading and market manipulation. He was banned from managing outside capital, barred from the Hong Kong securities markets, and paid a $44 million fine. Tiger Asia was shuttered, and Hwang was an industry pariah. It looked like a calamitous flame-out to a once brilliant career.
Hwang took his still considerable fortune, reported to be $200 to $500 million, and set up a family office, Archegos Capital in 2013. Barred from trading in much of Asia, his prior area of focus, Hwang pivoted to US growth stocks. He took huge, concentrated positions in a handful of stocks including Netflix, LinkedIn and Amazon. Unlike his time at Tiger Asia, he now utilized large portfolio leverage to magnify his performance. The combination of a highly concentrated portfolio of huge winners with massive leverage, propelled Hwang’s portfolio and net worth to an extraordinary peak nearing $20 billion. Hwang, who became a devout Christian in the aftermath of his legal troubles, continued to keep a very understated profile. While giving close to $1 billion to Christian charities over time, he nevertheless lived in a relatively unassuming $3 million home in New Jersey and drove a Hyundai SUV.
Hwang’s portfolio continued to surge in early 2021, with many of his holdings up, inexplicably, by 50 to 100% or more. It appears now that Hwang had orchestrated massive short squeezes in several of his holdings. Bizarrely, as his holdings surged higher-largely on his buying - he seemed to gain more conviction and added more leverage. He was drinking his own Kool-Aid. At its peak, the portfolio was levered five times, having $100 billion in gross exposure concentrated massively in a small handful of stocks.
It all began to unravel on March 22, 2021 when Hwang’s biggest position, Viacom, announced a large share offering to take advantage of its spiking share price. This small event was the spark that set off a cascade of falling dominoes, which ended finally with Archegos’ lenders force-selling its collapsing portfolio. When the dust settled, Hwang’s fortune was largely gone, and several of his lenders were looking at billions in losses. Whatever assets Hwang has left will be tied up in litigation for years. It is likely the largest and fastest collapse of a multi-billion dollar fortune in history.
There are many lessons from this sad story, here are three:
The perils of trying to get rich quickly in the stock market:
The stock market is a great place to build and sustain wealth over the long term, but a terrible place to do so on a short timetable. Stocks are simply too volatile and too unpredictable to try and augment with leverage. Investing is a long-term game, to benefit you need to survive the short term. You simply cannot risk getting taken out along the way.
All debt should be prudently managed within the construct of your financial concentration, illiquidity, and volatility of cash flows. Hwang had an incredibly concentrated portfolio which was so big it was essentially completely illiquid. To put 5x leverage on this was insane. When it worked, it really worked. However, if anything went wrong, the blowup risk was immense.
Don’t risk what you have and need for what you don’t have and don’t need:
It’s unclear what Hwang’s financial endgame was. What’s clear is he risked his livelihood, reputation and his family’s financial security to chase billions he would never need or ever be able to use. As a result, everything he likely cared about, from his family to his charitable causes, to his own future will suffer terribly from this lapse of judgment.
Don’t confuse your capacity to take risk with your need to take risk.
You can’t get a good financial outcome with a brilliant (but morally flawed) person:
Hwang had a history of serious ethical misjudgments, from his securities conviction, to engineering short squeezes, to purposely obscuring his financial condition and portfolio holdings from regulators and his banks. Though he had an illustrious investment career and genuinely unique skill, it was all overwritten by his poor judgment and integrity.
Surround yourself with people and partners of unimpeachable integrity and steer a wide berth from morally flawed, self-interested people-no matter how brilliant.
It’s been a very long bull market. It’s also been a long bear market in humility. Want to stay on path financially? Study financial failure.