Don’t Try to Get Rich Twice

Warren Buffett recently spent some time giving a talk to a group of MBA students at the University of Maryland and was asked what the most important skill in finance is. This was his response:

The most important skill in finance is salesmanship. That’s how you convince someone to marry you and that’s how you get a job. The most important quality to do well is temperament which would permit the control of fear and greed which have ruined many. Anyone who has become rich twice is dumb. Why would you risk what you need and have for what you don’t need?  If you are already rich, there is no upside to taking on a lot more risk, but there is disgrace on the downside.

The first part about sales is crucial (something that took me a long time to understand), but I thought his comments on becoming rich were insightful, as well.

Obviously, being rich is a good problem to have, but it can actually be difficult for many people to stay rich. There was a study performed earlier this year that took a look at the composition of the top 1% of incomes in the U.S. They found that 11% of Americans join the top 1% for at least a single year during their prime working years, but less than 6% are able to stay there for 2 years or more. So this group is constantly changing.

And as most people eventually learn, a high income is not the same thing as wealth.

It seems like every week there’s a new story about wealthy investors getting scammed in some sort of Ponzi Scheme. And the reason many people become wealthy in the first place is because they take great risks to get there. Those same risks are often their downfall. Preserving your capital is much different than obtaining it.

Many serial entrepreneurs do get rich twice, but I’m with Buffett — why risk what you need and have for what you don’t need? If you’ve already won the game, why continue trying to win even more?

Here are a few thoughts on how to preserve wealth if you happen to be lucky enough to be in this cohort:

  • First, do no harm. Avoid unnecessary or avoidable risks such as concentrating your investment holdings. There’s no reason to be a hero. Diversification is key here.
  • All investors need to consider their ability, willingness and need to take risk. If you’re already wealthy, you should overweight the need side of this equation when making decisions.
  • Never invest in something you can’t explain in 60 seconds or less. If you don’t understand it, don’t invest in it.
  • If it sounds too good to be true, it probably is.
  • Avoid any financial salesperson or advisor offering guarantees, especially in regards to promised investment return numbers.
  • Understand where you are in your investment lifecycle. If you are retired or are approaching retirement you have very little in terms of your greatest asset — human capital. If you are young, you still have a huge position in human capital.
  • You still have to worry about the threat of inflation and a rising standard of living when you are wealthy, but those worries are typically in terms of the next generation if you plan on passing money along to your children. All investors have multiple time horizons.
  • Don’t worry about what other people’s portfolios or investment holdings look like. There’s no need to worry about what your neighbors, friends or family members are invested in. Jealously and envy have no place in portfolio management. Boring will almost always trump exciting with your investments, but many wealthy people assume they need an exciting portfolio to keep up with their peers. It’s an expensive assumption.

Risk comes in many shapes and forms. For some people, risk means running out of money before they die. For others, risk means making huge mistakes. Wealthy investors should be more focused on the latter.

It’s hard enough to get rich once. Don’t force yourself to have to get rich twice.

Source:
Warren Buffett Meeting with University Maryland MBA Students (David Kass)

Further Reading:
Book Review: Simple Wealth, Inevitable Wealth

 

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  • Ravichand

    Simple yet potent thoughts on preserving wealth. Could you please also elaborate on the first part of salesmanship as well? Would love to know your thoughts.

    • Ben

      good question. might be good for another post but basically in terms of selling/marketing yourself to get a job, clients, revenue, etc.

      Persuasion is a very powerful tool. most people view selling as a bad thing but done the right way everyone is selling something. have to understand how to connect to others to get them on board

      • Ravichand

        Interesting thoughts. On the face of it ,the emphasis on salesmanship looked very “un Buffetly” from the general narrative. Thanks Ben.

      • FUH ЯION

        Persuading others to properly invest their retirement savings is easier said than done. I can’t even persuade my parents to properly allocate their savings. They always get angry and take it as a personal attack. Meanwhile I have to watch them tumble to financial ruin with their concentrated bets on single stocks !!

  • Stef

    interesting article though what does it mean in practice? If you take Buffett’s advice to his trustees to put 90% in SP500 ETF with a B&H strategy, and if you consider that historically there have been drawdowns up to (or down to) 90% if I am not mistaken, isn’t that taking unnecessary risks?

    • Andrew

      Good point. If his trustees could be prevented from selling at the bottom, it might work out. I imagine 90%+ of people would capitulate though!

      • Stef

        lol. So one solution may be to use MA or absolute momentum rules that get you out of severe bear markets before it’s too late. Though I guess ~90% of the time they would result in whipsaw losses 🙂

  • SHOfan

    Not a bad time to hold more cash and short-term treasuries. Wealth preservation is not a bad strategy once you have something to protect.

  • slotowner

    I like rule 3 the best. If you really don’t know the core concepts well enough to clearly & concisely explain it then your investing in blind trust. A known reasoning & strategy could be wrong & you’d lose money but an unknown strategy is just a random guess & is essentially gambling.

  • Andrew

    It is interesting how this perspective can shift. One might make these points when arguing for a simple low-fee 60/40 allocation, while many interested in value investing couldn’t imagine dumping their money into a market-cap weighted fund vs buying bargain/value stocks – while others view the bargain stocks as high-risk junk.

    Same for momentum. Many quants would argue it is one of the surest and safest way to go, avoiding high draw-downs, while others would view it as a high-risk unknown.

  • Mark Brady

    Buffett might want to consider refraining from labeling and categorizing people. I know two members of Mensa with multiple advanced degrees who have managed to lose multiple fortunes. Luck, fate, genetics and a perfect storm of stressors played significant roles on the way up and on the way down.

    • Stef

      I don’t think intelligence or having degrees has much to do at all with successuful money management (though emotional intelligence might help). Sir Isaac Newton lost the equivalent of 3 millions in the the stock market. As far I heard, Einstein also lost a lot money in the 1929 crash. On the other hand I remember when I was doing my PhD in physics one of my fellow students nearly failed his PhD and only got it because his supervisor put pressure on the examiners. That guy has been quite succesful on money management and has gone on to eventually menage over 1 billion for a Fidelity fund. I think that kknowing the right rules (which seem to be quite simple really) and sticking to them is much more important than intelligence.