AI Summary #
The host discusses the concept of getting rich versus staying rich, highlighting that these two skills are distinct and often conflicting. He notes that getting rich requires taking risks and being optimistic, while keeping money requires humility, frugality, and a fear of losing what one has.
The host shares stories of individuals who were successful in getting rich but struggled to stay rich, such as Jesse Livermore and Abraham Germansky. Livermore made a fortune in 1929 but eventually lost everything due to his impulsive decisions, while Germansky’s wealth was wiped out during the same period.
In contrast, the host praises Warren Buffett for his success in both getting rich and staying rich. He attributes this to Buffett’s ability to survive and persevere, rather than relying on innate intelligence or luck.
The host emphasizes that survival is key to financial longevity, highlighting three essential elements:
- Having a barbell personality with both optimistic and paranoid tendencies.
- Embracing room for error in planning and budgeting, allowing for flexibility and adaptability.
- Being willing to admit when plans go awry and adjust accordingly.
By adopting this mindset, individuals can increase their chances of financial success and longevity. The host concludes by encouraging listeners to focus on survival rather than seeking instant wealth or relying solely on innate intelligence or luck.
AI Transcription #
Hey everyone, welcome back.
It’s episode four.
We made it this far.
And what I want to talk to you about this week is something I’ve been thinking about a lot lately in the last six months.
I’ve been thinking about this idea for many years, in fact, that the last six months, it’s really calm home and we’ve seen a big spectacle of what I’m going to talk about today.
And that is how much money has been lost by so many smart people in the last year.
And there are so many companies, businesses, investors who became incredibly wealthy in 2020 and 2021 when tech stocks were just booming like they never had before and so much of that money has been given up this year in the last six or 12 months.
And look, some of that is normal investing volatility.
Of course, you should always expect periods of boom and bust in investing, but what’s happened over the last six or 12 months has been very extreme.
And there are plenty of people and plenty of businesses that will not survive financially what they have experienced.
I heard someone two years ago talk about tech investors who are becoming temporarily rich.
And someone else chimed in and said, they’re not temporarily rich.
They are pre bankrupt.
And I cut, I left at that phrase pre bankruptcy and of course, I have a lot of empathy for people who are going through something like this.
It is not fun to lose a fortune.
I think it hurts more to lose a fortune than it feels good to make a fortune to begin with.
So this is not to cast any sort of shade and Freud over what some people are going through.
But I’ve always been fascinated in the topic of getting rich versus staying rich, which are two completely different skills.
The skills that you need to get rich are very different from the skills that you need to stay rich.
Warren Buffett, and this was over 25 years ago that he talked about this, was giving a talk to a group of students.
And he was commenting on a group of very smart, very wealthy investors who were using a lot of leverage, a lot of debt to juice the returns.
And they went bankrupt.
This is the long term capital management group.
You’re familiar with it.
And here’s what he had to say about these investors.
So I’m not interested in that kind of a game.
And yet people do it financially, then, without thinking about it, Barry.
There was a great book, the great title.
It was a lousy book written once with a great title.
By Walter Gutman, the title was you only have to get rich once.
Now, that seems pretty fundamental, doesn’t it?
Yeah.
It does.
Get rich once.
That’s all you need to do is get rich once.
But I think the different skills of getting rich versus staying rich are pretty rare.
And they’re counterintuitive.
And they often like fight against each other.
They’re conflicting skills.
I once heard the story about Bill Gates that I thought was incredibly enlightening and really explained why he was so successful.
If you go back to the 1970s when Bill Gates started Microsoft, nobody in the world, maybe in the history of modern business, was taking as big of a risk as Bill Gates was.
Here was the skinny kid in his 20s who dropped out of college who says there needs to be a computer on every desk in the world, crazy audacious bold risk that he was taking.
At the same time, though, Bill Gates had this incredibly conservative mindset of he always wanted to have enough cash in the bank at Microsoft to be able to make payroll for one year with no revenue, which is like the most conservative way that you could possibly run a business.
So here you have this barbell personality, very risk taking on one end, very conservative on the other.
And this is why I think Bill Gates and people like him are not only very good at getting rich, but they’re equally good at staying rich for decades to come.
There are a million ways to get rich and there are plenty of ideas on how to do so, but there is only one way to stay rich.
It is some combination of frugality and paranoia.
And that’s a topic that we do not discuss enough.
Let me tell you the story of two investors.
Neither of whom knew each other.
They never met each other, but their past crossed in what I think is such an interesting way almost a century ago.
Jesse Livermore was the greatest stock market trader of his day.
He was born in 1877 and he became a professional trader before most people even knew that you could do such a thing.
And he was incredibly good at it.
By age 30, he was worth the inflation adjusted equivalent of a hundred million dollars.
And by 1929, Jesse Livermore was already one of the most well-known investors in the world.
And that year, of course, is when everything fell to pieces.
More than a third of the stock markets of value was wiped out in October of 1929.
This was, of course, the great crash that ushered in the Great Depression.
Jesse Livermore’s wife feared the worst when her husband came home on October 29, 1929.
There were reports of Wall Street speculators who were committing suicide.
And Jesse Livermore’s wife and her children greeted Jesse at the door in tears.
And his mother-in-law was so distraught that she hid in another room screaming, assuming that they were all broke after the stock market crash.
But Jesse Livermore, according to his biographer, stood confused for a few moments before he realized what was happening.
And then he broke the news to his family.
That in a stroke of genius, and maybe a little bit of luck, he had been short the stock market in October of 1929.
He was betting that stocks were declined.
His wife Dorothy Ash, she said, you mean we are not ruined?
And Jesse said, no darling, I have just had my best trading day ever.
We are fabulously rich and we can do whatever we like now.
Dorothy, the wife, ran back to her mother who was crying and told her to be quiet.
Jesse Livermore had in one day made the inflation adjusted equivalent of $3 billion in one day.
So during the worst month in the history of the stock market, he became the richest man in the world.
Now here’s the other part of the story.
As Jesse Livermore’s family celebrated, they’re unfathomable success.
There’s another man in New York who was wandering around the streets in desperation.
Abraham Germansky was a multi-millionaire real estate developer who made a fortune during the rowing 1920s.
As the economy boomed, he did what virtually everyone else did in the 1920s, which is he bet heavily on the surging stock market.
Now on October 26, 1929, the New York Times published an article that in two paragraphs portrays the tragic ending of Abraham Germansky.
Let me read you that article now.
It says, quote, Mrs Abraham Germansky of Mau Vernon is asking for help to find her husband missing since Thursday morning.
Germansky, who was 50 years old and an East Side real estate operator was said to have invested heavily in stocks.
Mrs.
Germansky said that a friend saw her husband late Thursday on Wall Street near the stock exchange.
According to her informant, her husband was tearing a strip of ticker tape into bits and scattering it on the sidewalk as he walked towards Broadway.
That is such a incredible description of what is happening here.
You can picture this depressed guy tearing up a ticker tape, leaving the stock exchange, and as far as I can tell, piecing this together, that was the end of Abraham Germansky.
So here we have a contrast.
The October 1929 crash made Jesse Livermore one of the richest men in the world, but it ruined Abraham Germansky, perhaps taking his own life as many others did that day.
But if you fast forward four years, these two men’s story converge.
After his 1929 blowout success, Jesse Livermore, who was overflowing with confidence, made even larger and larger beds on the stock market.
He wound up far over his head, in ever-increasing amounts of debt, and he eventually lost everything in the stock market.
Broke and ashamed, he disappeared for two days in 1933.
His wife set out to find him as well.
There’s another article in the New York Times in 1933 that says, quote, Jesse Livermore, the stock market operator of 1100 Park Avenue, is missing and has not been seen since 3pm yesterday.
Now, he eventually returned, but his path was set.
Jesse Livermore eventually took his own life.
So the timing was different, but Germansky and Livermore shared a character trait here.
They were both very good at getting wealthy and equally bad at staying wealthy.
And even if wealthy is not a word that you would apply to yourself, the lessons from that observation, I think apply to everybody at all income levels, that getting money is one thing and keeping it is quite another.
If I had to summarize money success in a single word, it would just be survival.
Just serve the hevel.
Let me tell you something astounding.
40% of companies that are successful enough to become publicly traded, lost effectively all of their value over a 40 year period.
That’s according to a JP Morgan study.
40% of companies that are successful enough to become public don’t survive.
And this is true for individuals as well.
The Forbes 400 list of the richest Americans has on average 20% turnover per decade.
For causes that don’t have anything to do with death or transferring money to another person.
20% of people who are rich enough to become the billionaires on the Forbes list lose enough money to be kicked off of it every decade.
So look, capitalism is hard of course.
In some ways, of course, this is how it’s supposed to be.
But part of the reason this happens is because getting money and keeping money are two different skills.
Getting money requires taking risks and being optimistic and putting yourself out there.
But keeping money requires the exact opposite of that risk taking.
It requires humility and a fear that what you’ve made can be taken away from you just as fast.
It requires frugality and in acceptance that at least some of what has made you wealthy to begin with is attributable to luck.
So past success cannot be relied on to repeat indefinitely.
Michael Lawrence, the billionaire head of Sequoia Capital, which is the most successful eventual capital firm in history.
He was once asked by Charlie Rose why Sequoia was so successful, just what the secret was.
And more it’s mentioned something I think was so interesting.
He said quote, I think we’ve always been afraid of going out of business.
Charlie Rose said really it’s it’s fear only the paranoid survive.
And more it said quote, there’s a lot of truth to that.
We assume that tomorrow won’t be like yesterday.
We can’t afford to rest on our laurels.
We can’t be complacent.
We can’t assume that yesterday’s success translates into tomorrow’s good fortune.
So here again, it’s survival, not intelligence, not insight, not brains, which look if there’s any investor in the world who is who can justify saying that the secret to their success is that they’re very smart.
It’s somebody like Mike Meritz, but he doesn’t.
He says it’s survival and paranoia.
Just the ability to stick around for a long time without getting wiped out.
We’re being forced to give up.
That is what makes the biggest difference.
And I think that should be the cornerstone of everybody’s financial strategy, whether it’s investing or your career or business that you own.
There are two reasons why a survival mentality is so key with money.
The first is obvious.
It’s that there are very few gains that are so big that they’re worth taking a risk that could wipe you out, no matter how small those odds.
The other is just the counterintuitive math of compounding.
Compound interest only works if you can give an asset years and years and years to grow.
I think it in many ways, it’s like planting an oak tree where one year of growth never really shows that much progress.
10 years of growth, it’s like, oh, you can start seeing a little bit of difference, but 50 years of growth, then you see something absolutely extraordinary.
The longer you stick around, the crazier the numbers get.
But getting and keeping that extraordinary growth requires surviving just all the unpredictable ups and downs that everyone inevitably experiences over time.
So we can spend years trying to figure out how somebody like Warren Buffett achieved his investing returns, like how he found the best companies and the cheapest stocks and the best CEOs.
That’s really hard to do.
It’s not impossible, but that’s a difficult and complicated topic.
I think less hard, but equally important, is just pointing out what he did not do over the last 80 years.
He didn’t get carried away with debt.
He did panic and sell during the 15 recessions that he has lived through.
He didn’t sully his business reputation.
He didn’t attach himself to one strategy or one worldview or one passing trend.
He didn’t rely on other people’s money.
He didn’t burn himself out in quit or retire.
He survived.
Survival gave him financial longevity and longevity allowed him to start investing at age 10 and continue full speed today when he’s age 92.
That is what has made him so successful.
That single point, the endurance and the amount of time that he’s been investing for, is the single most important point that describes and explains Warren Buffett’s success.
To show you how powerful this can be, a very pointed example of what I mean, let me tell you the story about a guy named Rick Gurren.
Everyone of course is heard of the investing duo of Warren Buffett and Charlie Munger.
But 40 years ago there was actually a third member of that group.
It was a guy named Rick Gurren.
And so Warren and Charlie and Rick used to make investments together and they interviewed business managers together.
They were like this investing trio that all were doing things altogether and then Rick kind of disappeared.
At least relative to what Buffett and Munger became eventually.
Many years ago there was a hedge fund manager named Monash Brebray and he was having dinner with Warren Buffett and he asked Buffett, he said, what happened to Rick Gurren?
And Warren told him this fascinating story.
He said, look, Rick Gurren was just as smart as Warren or Charlie was.
He was just as talented.
He was just as good at investing.
But Rick Gurren was kind of in a hurry.
Back in 1970, he wanted to get rich fast.
And so he used a lot of debt.
He used a lot of leverage.
And in 1973 and 1974 the stock market crashed.
And Monash Brebray writes, the stock market went down almost 70% in those two years.
So Rick got margin called.
He sold all of his Berkshire stock back to Warren.
Warren actually said, I bought Rick’s Berkshire stock at under $40 a share.
Rick was forced to sell because he was levered.
And so I think this is just so fascinating that someone who is just as smart as Warren and Charlie but who was in a little bit of a hurry gets wiped out.
During that dinner with Monash Brebray Warren said, look Warren and Charlie always knew that they would get rich.
They were not in a hurry.
Rick was just as smart but he was in a hurry.
Not seem to talent put it this way.
He said, having an edge and surviving are two different things.
The first requires the second.
You need to avoid ruin at all costs.
The ability to apply this survival mindset in the real world comes down I think to appreciating three things.
Number one, more than I want big investing returns, I want to be financially unbreakable.
And the irony is that if I’m unbreakable, I actually think I will get the biggest investing returns because I’ll be able to stick around long enough for compounding to actually work.
Nobody of course wants to hold cash during a bull market.
They want to own assets that go up and up a lot.
You look and feel conservative holding cash during a bull market because you become acutely aware of how much return you are giving up by not owning the good stuff.
So say your cash earns a 1% return in the bank and stocks are returning 10% per year.
That 9% gap will nigh you every single day during the bull market.
But if holding that cash prevents you from having to sell your stocks during a bear market, the actual return that you earned on your cash is not 1% per year.
It could be many, many multiples of that because preventing one desperate ill time stock sale can do more for your lifetime returns than picking dozens of big time winners.
Compounding does not rely on earning big returns.
Just average merely good returns sustained uninterrupted for the longest period of time, especially during cut times of chaos and havoc, that’s what actually produces the biggest wins during your life.
Number 2.
Planning is important, but the most important part of every plan is planning on the plan not going according to plan.
That is so difficult to say.
I’m sorry.
So of course, there’s that there’s that saying you plan and God laughs.
And financial and investing planning are critical because they’d let you know whether your current actions are within the realm of reasonable.
But few actual plans survive any kind of encounter with reality in the real world.
If you are projecting your income and your savings rate and the market return over the next 20 years, think about all the big stuff that’s happened in the last 20 years that no one could have actually foreseen.
9-11.
A housing boom in bus that caused 10 million people to lose their houses, a financial crisis, a pandemic, all of these things are so impossible to see coming.
But then as you’re looking over the next 20 years and you’re trying to predict what the market return is going to be or what your job is going to, how your career is going to play out, a plan is only useful if it can survive reality.
But a future that is filled with unknowns is everybody’s reality.
So a good plan does not pretend that that is not true.
It instead it embraces and it emphasizes room for error.
The more you need specific elements of a plan to be true, the more fragile your financial life becomes.
If there’s enough room for error in your savings rate, then you can say, hey, it would be great if the stock market returns 8%.
A year over the next 30 years.
But if it only does 4% a year, I’ll still be okay.
The more you can say something like that, the more valuable your plan actually becomes.
Many financial bets fail, not because they were wrong, but because they were mostly right in a situation that required things to be exactly right.
So room for error or margin of safety, whatever you want to call it is one of the most underappreciated forces in finance.
And it comes in all kinds of forms, a frugal budget, flexible thinking, a loose timeline, anything that lets you live happily with a wide range of outcomes is putting you in a better spot.
And that is not to say that you are being conservative.
Room for error does not mean you are conservative necessarily.
Conservative is avoiding a certain level of risk.
Margin of safety is raising the odds of success at a given level of risk by increasing your chances of survival.
And its magic is that the higher your margin of safety, the smaller your edge needs to be to have a favorable outcome.
Number 3 is having a barbelled personality, being optimistic about the future, but paranoid about what will prevent you from getting to the future.
That is so vital.
Optimism is usually defined as a belief that things will go well.
But that’s a very incomplete definition.
Sensible optimism, reasonable optimism is the belief that the odds are in your favor, and over time, things balance out to a good outcome, even if what happens in between is filled with misery.
And in fact, you know that it will be filled with misery.
You could be optimistic that the long-term growth trajectory at the stock market or your career is up and to the right.
But you could be equally sure that the road between now and then is filled with landmines, and it always will be.
Those two things are not mutually exclusive.
The idea that something can gain over the long-term while being a basket case in the short-term is not intuitive, but there are so many things that work that way in life.
Let me give you a little analogy here.
By age 20, the average person has lost roughly half of the snapped connections in their brain that they had at age 2, as the old inefficient and redundant neural connections are cleared out.
But the average 20-year-old is much smarter than the average 2-year-old, so destruction in the face of progress is not only possible, but it’s an efficient way to get rid of excess.
But look, imagine if you were a parent and you could see inside your child’s brain every day.
Every morning you noticed that there were fewer snapped connections in your child’s head than the day before.
You would panic.
You would say, this can’t be right.
There’s loss and destruction.
We needed intervention.
We need to see a doctor here.
But you don’t.
What you are just witnessing is the normal path of progress.
And economies and markets and careers often follow a similar path.
Growth amid loss.
Look, over the last 170 years, I’m using an unreasonable time frame here just to make my point, but over the last 170 years, GDP per capita in the United States has increased 20 fold.
A 20 fold increase in our standard of living.
That is absolutely remarkable.
It’s one of the most amazing things that’s happened in human history is the economic progress over the last 170 years.
But think about what happened in the United States over the last 170 years.
I have a list of terrible things that happened.
I’m going to read a couple of them to you now.
1.3 million Americans died fighting nine major wars.
Roughly 99% of all companies that were ever created went out of business.
4 US presidents were assassinated.
There were 30 separate natural disasters that killed 400 Americans.
There have been 34 recessions that lasted a cumulative 49 years.
The stock market fell more than 10% from recent high, more than 107 times.
Stocks lost a third of their value 13 times.
And the words economic pessimism appeared in newspaper 29,000 times.
Our standard of living increased 20 fold, but barely a day went by that lacked a tangible reason to be pessimistic.
So a mindset that can be paranoid and optimistic at the same time is hard to maintain, because seeing things as black and white takes way less effort than accepting nuance.
But you always need short term paranoia to keep you alive long enough to exploit long term optimism.
Jesse Livermore figured this out the hard way.
He associated good times with the end of bad times.
Getting wealthy made him feel like staying wealthy was inevitable that his success made him invincible.
But after losing nearly everything and going bankrupt, he reflected.
He said, quote, I sometimes think that no price is too high for a speculator to pay to learn that which will keep him from getting a swelled head.
A great many financial smashes by brilliant men could be traced directly to the swelled head.
He said it is an expensive disease everywhere and to everybody.
That’s all for this week.
Thank you so much again for listening.
This has been a lot of fun.
Hope to see you next time.
Thanks again.