Does it really take losing it all to learn how to keep it?
What have your summer reads been? I read a cheeky novel from a hundred years ago. It tells a story of a man who inherits a million dollars from his grandfather, only to find out that he has to spend and lose it within one year, and become penniless to inherit seven million from his uncle instead. Between excessive spending and poor investments, he learns a lot in the process; I know I have reading his story. It dawned on me that this hundred-year-old novel by George Barr McCutcheon — Brewster’s Millions may hide keys to successful wealth preservation.
In today’s money, Monty Brewster’s inheritance would be equivalent to $30 million and $200 million dollars. These are very respectable amounts, and $30 million wouldn’t seem easy to spend or lose. The spending challenge mentioned in the novel was not about acquiring homes and assets but actually wasting it away throwing parties, hosting dinners, traveling the world, and more.
The last two years might have been very disorienting for many investors. For a while, everything was going up. One could make money in stocks, even those with no profit or no business, cryptocurrencies, NFTs (non-fungible tokens), home prices were rising, and even used cars got more expensive and sometimes more valuable than new ones! You could make money even if you didn’t want to!
If you can’t lose money buying a used car, it’s game over. Cars have always been the epitome of a money-losing purchases.
Last year’s experience of easy money in anything from stocks to digital assets and used cars is actually not that different from Monty Brewster’s experience with poor investment choices, which led at first to even more money, not less. He learned that sometimes it might be really hard to lose money, at least in the short-term.
There are at least three lessons from Brewster’s story:
- There is no amount of money that can’t be lost.
- Saving can be a challenge at all wealth and income levels.
- Acting as if a second larger inheritance was around the corner might not be a good idea.
The novel taught me that there is no amount of money that can’t be lost.
Monty’s $1 million ($30 million in today’s money) gets quickly dwarfed by a multi-billion dollar fortune lost by a seasoned hedge fund manager last year. Bill Hwang made ever more audacious speculative bets and managed to lose $20 billion in two days. Monty needed a whole year to part with $1 million. Mr. Hwang took two days, and he was not the only one. Eike Batista, a Brazilian billionaire, went from hoping to become the richest person in the world to losing all — $35 billion in a year between 2012-2014. That’s a thousand times as much as Monty struggled to waste away. Both Mr. Hwang, and Mr. Batista combined highly risky speculations with a lot of borrowed money. It’s an explosive combination that can turn billions into nothing. Since Monty’s times a century ago, people have invented many more ways to make and lose money, from derivatives to digital assets, and more.
Brewster’s tale showed me again how saving is a real challenge no matter how much wealth or income we have at our disposal.
Monty embarked on very expensive international trips. That was before budget airplanes took us around the globe. Travel was still a domain of well-to-do individuals who had both means and time. Europe wasn’t a quick overnight redeye flight away but a long sail away. As incomes and wealth rise, our appetites follow. We think that we need and want more. It might be less of a surprise that 60% of Americans live paycheck to paycheck, but it is a bit shocking that one out of three of those making $250,000 does so too. Monty’s spending habits grew into his new wealth, and income level as they do for us all sometimes.
I noticed another theme from the book. I see how when we receive a lump sum in our lives; we often assume that another one is right around the corner.
Some might act as if that first big amount was just a trial, a time to learn the ropes, and there will be a chance to take the second one much more seriously. We know well the tale of the Vanderbilts, once the richest family in the country. It took only one generation of excessive spending and poor investment choices to part with most of the fortune. Lottery winners follow a similar path. “According to the National Endowment for Financial Education, about 70 percent of people who win a lottery or receive a large windfall go bankrupt within a few years.” While professional athletes, after an often short but very lucrative career, often go broke, a staggering 78% of them in three years into retirement.
The first lesson reminds me of something we write about quite often. There are certain risks that are not worth taking. Warren Buffett explains: “Never risk what you have and need for what we don’t have and don’t need.” It may take a pause and wake-up call to realize that there are risks that nobody, even the richest, can afford to accept.
The second lesson has been a polite reminder of a phenomenon I have witnessed over the years. It’s referred to as lifestyle inflation. We trade what we have for something better. It makes the escape from paycheck to paycheck life almost impossible, and it follows us all the way to the top of earning levels. It may take a real deliberate approach to let spending fall back and decouple from rising income and wealth.
Last but definitely not least. Monty was fortunate enough to have $7 million follow his first $1 million. After a year of intense practice in money-losing, he was a lot more ready for the second inheritance. In life, it may usually be one single life-changing wealth moment with no second chances. We often share how the fortunes that we care for represent the money that our clients don’t immediately need, but most of all, money they can’t afford to lose.
A large inheritance, a big pay at a company, a liquidity event for the founders or a family nest egg saved away over the years, they follow the same logic. It would make sense to take a small portion, spend, and lose all of it, commit all the possible mistakes, and walk away ready for the bigger pie.
In life, it’s rarely that simple, though. Brewster’s uncle wanted to make a point by adding a twist to his inheritance. The uncle tried to settle an old score. He didn’t like the grandfather who disapproved of Brewster’s parent’s marriage. The family feud aside, this experience taught Brewster how to handle a large lump sum. He was much more prepared for his uncle’s fortune.
Does it really take losing it all to learn how to keep it? Is it only then that we appreciate how to grow and preserve what we have? We, at Sicart, think we could do the second best, learn from other people’s mistakes, and keep our own mistakes small enough not to matter in the long run.
Monty Brewster’s tale reminded me of some ages-old wisdom:
- there are risks not worth taking,
- saving takes effort, and
- let’s treat the first fortune as the only one coming.
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