Beyond The Headlines
Penny Wise, Pound Foolish
Pennies, cents, pounds, dollars, euros – it’s sometimes curious how we think of money. A while ago, I remember someone sharing with me a tale of old Wall Street. With a lot of self-made fortunes, many investors tended to be penny-wise but at times pound foolish. The smaller amounts were easier to relate to, they felt familiar, and the larger ones were so disproportionately big that the right penny habits didn’t capture them. Doesn’t it happen to us all now and then?
As simple as it may seem, it would be ideal to be wise with both pennies and pounds. Maybe even wiser with pounds than pennies? Who would know it better than the famous billionaire investor who literally turned his childhood newspaper route cents into over a hundred billion dollars in various holdings? I can’t help but think of his story of not selling his Berkshire Hathaway shares back in 1964 because the price was a few pennies short of what he expected.
Berkshire was a terrible business, as Buffett admits in his letter: “Berkshire – Past, Present and Future.” It was meant to be a short-term holding, and only about 7% was owned by Buffett Partnership. Because Berkshire’s CEO purchase offer short-changed Buffett with an eighth of a point, which in old Wall Street speak meant 12.5 cents (at some point, it was the smallest amount a stock could change in price), Buffett ended up buying more of Berkshire. He writes: “I became the dog who caught the car.” Berkshire’s textile business became a very costly distraction for the following 18 years, when the mills were finally closed.
All this trouble for 12.5 cents! Buffett called it a “monumentally stupid decision.” Penny wise, but pound foolish.
I get asked now and then about budgeting and tracking your expenses. I am a big fan. How can we start to be wise with dollars if we haven’t figured out the pennies, I always wonder? That’s the only way to get a grip of your spending, no matter where your monthly budget falls. I credit my grandma for instilling in me the importance of pennies and cents. I can see how they add up and grow. Buffett’s longtime business partner, Charlie Munger, said that the first $100,000 is the difficult part of building wealth. He advised: “I don’t care what you have to do—if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000.” In the book on Munger “Damn Right”, we read: “Making the first million was the next big hurdle. To do that, a person must consistently underspend his income.”
Before we get to bigger numbers, it seems that a million is what we can all agree on. It’s one with six zeroes. When we leave the cents, the dollars, everything gets a lot more confusing.
What’s a trillion dollars? How many zeroes is that? Apparently, we can’t even agree on that! As defined on the short scale, a trillion is one million million (ten to the twelfth power or one with twelve zeros). That’s what we use both in American and British English. Continental Europe, where I received most of my education, a million million is “only” a billion. I bet that U.S. policymakers would be relieved if they knew that their trillion-dollar spending plans translate as “only” billion-dollar plans in the long scale. Let’s not share it with them. On the other hand, the half a dozen trillion-dollar tech companies that we have in the U.S. today would be rather sad to lose their gilded status and be referred to as “mere” billion-dollar companies (again!). Speaking of billions, some may still remember a failed libel lawsuit filed by a famous billionaire over being called only a millionaire.
I remember watching an interview with a Brazilian billionaire Eike Batista who made a fortune in oil, gas, and mining. He expected to be the richest person in the world in no time. With lots of leverage, gigantic speculative bets, he got as high as the eighth spot on the world’s richest list. A year later (about a decade ago), he was reported to have a negative one billion net worth down from $35 billion. His experience made me realize that there is no amount of money that can’t be lost.
Bill Hwang from Archegos Capital, or as the media described him, “the greatest trader you have never heard of” managed to lose $20 billion in two days only earlier this year. His net worth might have seemed as “liquid as a government stimulus check,” as Bloomberg wrote, but was used to build a $100 billion portfolio with borrowed money. The market turned, and the highly leveraged trade quickly went south.
Both former billionaires openly shared on many occasions how they grew up in modest circumstances—both knew well how to count pennies. Neither of the two investors was in dire need of quick gains anymore, though. Warren Buffett reminds us often that: “It’s insane to risk what you have to get something you don’t need.” We learn from another investor, and author Vitaliy Katsenelson that “You cannot use logic and reason with a person who wants to get rich fast.”
When we make small spending decisions, we seem to be well versed in the amounts we are dealing with. We all saved a few dollars on groceries here and there. We are all probably guilty of driving an extra mile to buy gas 10 cents cheaper. We all might have gotten offended when we saw a cup of coffee priced a few nickels higher than we are used to. It gets a little tricky when the amounts get bigger. We buy cars looking at the monthly payment, or we buy homes looking at the monthly mortgage. We forget to look up and see the full price tag or the million-dollar mortgage behind it – the true cost.
I see how investment decisions can be taken with equally insufficient care. Highly speculative derivatives are bought for cents per contract but amount to million-dollar losses taking away a lifetime of savings. Big, quick, abrupt choices are made with large amounts only because they seem harder to embrace, and the true risk escapes our imagination.
In the last year and a half of market and economic recovery, we have witnessed a more than usual size and frequency of riskier behavior. Hard-earned savings have been spent and invested in less careful ways at times, and if that wasn’t enough, they were supplemented with borrowing.
We all probably have been more than once penny wise and a touch pound foolish at some point, but the same way Buffett looked back and learned from his mistakes, maybe we all can get a bit wiser when our cents turn into dollars. It would be ideal to be wise with both small and large amounts. Maybe even wiser with the larger ones. If we treat our dollars with the same care and patience that we treat our cents, we’d be better off in the end; at least, that’s what I plan to do!
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