Does being rich make you smarter?
Submitted by Mark on 15 May 2007 - 6:06am
I could hardly stand to read this story about a .com millionaire. Here's a guy, arguable a successful entrepreneur, who has had the good fortune to launch several successful businesses in his lifetime.
At least a couple of them were internet startups that put his net worth solidly in the eight figure range. He's set for life. Now you might think a guy this smart would cash some of it out and lock in those gains. You know, secure his financial future.
Instead, he leverages his personal fortune, taking on debt against his dot com boom inflated personal portfolio to buy a bunch of rich boy toys. You know what happens next. The bottom falls out of the market. His net worth plunges, leaving nothing on the asset side of the balance sheet to counterweight the debts on the liabilities side.
Time for the lawyers. Now he suing his investment bank, the guys who funded his startups and granted him the personal loan. He claims they were negligent in not hedging his portfolio against losses.
Let's tally up the score here. Where might he have gone wrong?
- Lack of diversification. He had all his golden eggs in one basket
- Leverage. He borrowed against his under-diversified portfolio
- He got greedy. He didn't take some money off the table as his fortunes rose
- He held on too long
- Blaming others. Whose fault is it when one of your investments tanks? Is he different somehow?
Each and every one of the mistakes this gentleman made is one we're all likely to fall prey to. As much as we'd like to admit it, a certain flavor of hubris kicks in when we're doing well. One thing you must learn to be a successful investor is that the same rules that applied to you when your portfolio was tiny also apply when you're wealthy.
Becoming wealthy doesn't make you exempt from these rules. It doesn't mean you're any smarter than you were or that you're any smarter than the next investor. Learn that, and you stand a very good chance of becoming wealthy.
blames the bank for not protecting his wealth
put all his egs in one basket - did not diversify
cash out sell at least some portion of a runaway winner should you be lucky enough to latch on to one
remember, it's just an investment. You're not married to it. When it has done its job it's time to move on.