Learning how to make millions is one thing, but mastering the
art of keeping that fortune intact is a different task. Many people
get rich, only to blow their earnings in a matter of years. We have also
seen successful businesses and corporations going into oblivion in a short
time.
There is an old saying, “Getting rich can be the biggest
impediment to staying rich.”
It normally follows a pattern; the more successful you are
at something, the more convinced you become that you’re doing it right. The
more convinced you are that you’re doing it right; the less open you are to
change. The less open you are to change, the more likely you are to tripping in
a world where the only constant is change.
Andy Grove, Intel’s founder, put it this way: “Business
success contains the seeds of its own destruction. Scrappiness and the ability
to think differently turns into complacency and the desire to keep things the
same.”
It’s why the composition of Stock market Index companies
changes so much over time;our very own Nifty with 150
changes in the past 18 years is very different from the index that was launched
in 1996. Only 16 (or 32 per cent) of the original 50 constituents are still in
the index. Of these, only 13 have stayed throughout. This 68 per cent churn in
the Nifty in last 18 years is fairly high, but not extraordinary. The 30- share
Dow Jones Industrial Average (DJIA) of the US, which is 100 years older than
the Nifty, has witnessed a 400 per cent churn in the past 118 years. While the
Nifty has replaced 34 companies in past 18 years, DJIA has swapped nearly 120
companies since it was established in 1896. On an average, both indices have
seen a 3.8 per cent churn every year.
Most companies who have sustained success were, for the most
part, paranoid, eager and willing to jettison past success in an attempt to
keep up with where the world was heading next. They changed businesses,
cannibalized their own successful businesses, took risks in new industries,
with new approaches, and new partners, knowing that what worked yesterday isn’t
necessarily going to work tomorrow.
Even in the case of Individuals, as per a study, even the
Forbes list of billionaires has a 60% turnover every decade. Many
traditional Indian Business families like the Modis, Bangurs, Dalmias, have
been replaced by the Ambanis, Mittals, Munjals and many such new generation
Entrepreneurs.
Most people think making money is more difficult compared to
managing it. Studies have shown that an estimated 70 percent of people who receive a
financial windfall — a large amount of sudden money — won’t have any left
within a matter of a few years.
There are numerous examples of many successful and rich people who
become wealthy and loseit all in no time. Sportspersons, movie stars,
Investment bankers, professional managers, business czars and many others who
receive a windfall. These wealthy people make tons of money, earning is not an
issue, But they also loose it in quick time, filing for multiple bankruptcies.
Why does it happen?
What is the problem in holding on to those billions? Even a
conservative return on investment would be enough for them to take care of
their life style expenses. Isn’t it?
I don’t have an intelligent answer to this situation. Common
wisdom tells us that they must be spending multiple times than their earnings
to get into this situation. Or they may be making poor investments, not
creating a passive income, taking unnecessary leverage to make bigger investments,
gambling and taking unnecessary risks or someone managing their moneymay be
squandering it or taking a bigger share for himself over the top.
Most fortune receivers end up buying liabilities dressed as
assets; summer beach houses, High end cars and so on which not only consumes
expensive capital but also has huge maintenance costs and the “asset”
depreciates over time. As they say, “wine is not an asset, if you consume it as
soon as you buy it.”
(Check
out our earlier blog on the subject, https://www.sahayakassociates.in/resources/our-blog/2553-sahayak-associates/sahayak-associates-blog/8356-how-to-handle-a-windfall)
In my opinion, managing money is all about controlling your risk.
Take where you need it and avoid where it should be.
Most have the problem in understanding their own risk profile and
decide what is good for them. They also overestimate their risk taking ability
and financial capacity and end up in precarious situations.
I came across a wonderful story, which I shall like to share to
further illustrate the point.
“Abraham Germansky was a multimillionaire real estate
developer in 1920s. He also loved stocks, betting heavily as the market boomed.
As the crash of 1929 unfolded, he was wiped out and that was basically the end
of Abraham Germansky.
Germansky disappeared on October 24th, 1929. The New York Times posted a short story near the back
of its October 26th edition, with Germansky’s lawyer, Bernard Sandler, asking
for information on his whereabouts. It tells a powerful story in just a few
words.
Later that week another investor in the same city had a very
different experience.
Jesse Livermore returned home on October 29th to a wife who,
seeing news of the day’s record market crash, was prepared to console her
husband and return to a life of frugality.
Jesse said that wasn’t necessary. He was short in the market
and made more money in the crash of 1929 than during the rest of his life
combined.
“You mean we are not ruined?” his wife asked, according to
Livermore’s biography.
He replied: “No darling, I have just had my best ever
trading day – we are fabulously rich and can do whatever we like.” He made, in
one day, the equivalent of $3 billion.
Completely opposite stories, Germansky went broke; Livermore
became the richest man in the world.
But fast-forward four years and the stories end up nearly
identical.
Livermore made larger and larger bets, and went on to lose
everything in the stock market. Broke and ashamed, he disappeared for two days
in 1933. His wife set out to find him. “Jesse L. Livermore, the stock market
operator, of 1100 Park Avenue missing and has not been seen since 3pm
yesterday,” the New York Times wrote
in 1933.
Livermore was one of the most
skilled people in the world at getting rich. He made and lost at least four
fortunes, never going more than eight years without flirting with bankruptcy.
After his third wipeout,
Livermore recognized his mistake: Getting rich made him feel invincible, and
feeling invincible led him to double-down with leverage on what worked in the
recent past, which was catastrophic when the world changed and the market
turned against him.
He returned each time, but his path was set. Livermore lost
it all and eventually took his own life.
The timing was different, but Germansky and Livermore shared
the realization that getting rich is one thing and Staying rich is quite
another.
Another thing that you must understand is that there
is a huge difference between making lots of money and being rich. Income is not the same thing as wealth. Those who earn a high
income give themselves a better chance of becoming rich but there is far more
temptation to inject extreme lifestyle inflation into the mix when you earn a
bigger paycheck.The difference between how much you make and how much you spend
is often a tug of war between ego and humility.
A
recent study of 2,523 people around the world with an average net worth of $7.6
million offers a perspective on how the rich stay rich and where they invest
their money.Research firm Scorpio Partnership and BNP Wealth
Management surveyed the millionaires in 17 countries about
where they invest their fortunes. Not only was the breakdown of how the rich
stay rich interesting,but also the differences across the globe were quite
surprising.Some quick takeaways from the survey:
·
Rich people actually
keep more money in ‘safe investments’ like bonds and even cash compared to
stocks.
·
The rich are also heavily
invested in alternative investments like real estate compared to the average
investor. No other investment has created, as much family wealth as property
and it’s a great source of cash flow for them.
·
The rich didn’t get
that way from investing in stocks. They have less than one in every five
dollars in the stock market.
·
Almost two-thirds (60%)
of the rich came from families that had started their own businesses and
investing in their own business was the biggest amount for most groups. On an
average, people reported starting between four and five businesses.
Getting rich is not the same thing
as staying rich.
There are plenty of ways to get rich — a successful business
venture, inherit money, a lucky break, a windfall, intelligent investing etc.
But staying rich involves just a few simple things — self-awareness, modesty,
humility, save & invest wisely and the ability to delay gratification with
a portion of your capital.
No matter how much you make, you still have to save, and
invest wisely to build actual wealth and stay wealthy.To stay wealthy, you have
to understand that tomorrow won’t be like
yesterday, you can’t afford to rest on your laurels, you can’t be complacent,
you can’t assume that yesterday’s success will translate into tomorrow’s good
fortune.
It is not skill, or market insight, or even hard work but a
dose of fear and humility is what will keep you on track to stay wealthy.
I shall like to end
with the famous quote; “Rich people stay rich by living like they are broke and
poor people stay poor by living like they are rich.
Happy Investing!
Stay Blessed Forever
Sandeep Sahni
Note: All information provided in this blog is for
educational purposes only and does not constitute any professional advice or
service. Readers are requested to consult a financial advisor before investing
as investments are subject to Market Risks.
About The author
Sandeep
Sahni
Sandeep is
alum of IIM Lucknow with a Post Graduate Degree (MBA class of 1988). His also
an alum of Shri Ram College of Commerce, Delhi University (B.Com. (Hons.) Class
of 1985.)
Sandeep's
investing experience and study of the Financial Markets spans over 30 years. He
is based in Chandigarh and has been advising more than 500 clients across the
globe on Financial Planning and Wealth Management.
He has
promoted “Sahayak Gurukul” which is an attempt to share thoughts and knowledge
on aspects related to Personal Finance and Wealth Management. Sahayak Gurukul
provides financial insights into the markets, economy and Investments. Whether
you are new to the personal finance domain or a professional looking to make
your money work for you, the Sahayak Gurukul blogs and workshops are curated to
demystify investing, simplify complex personal finance topics and help
investors make better decisions about their money.
Alongside,
Sandeep conducts regular Investor Awareness Programs and workshops for Training
of Mutual Fund Distributors, and workshops and seminars on Financial Planning
for Corporate groups, Teachers, Doctors and Other professionals.
Through his
interactions and workshops, Sandeep works towards breaking the myths and
illusions about money and finance.
He also
writes a well read blog;
He has also
conducted presentations, workshops and guest lectures at Management institutes
for students on Financial Planning and Wealth Creation.
He can be reached at:
+91-9888220088, 9814112988
sandeepsahni@sahayakassociates.com,
sandeepsahni@sahayakassociates.com,
Follow on:
www.sahayakassociates.in,
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