It’s a lesson that has been taught many times over many years yet still goes unlearned. This lesson has gone as far back as the late 1700s with the Buttonwood Tree Agreement, yet still catches young investors today – Getting rich and staying rich require different skills, and not understanding that lesson can lead to financial ruin.
The article recently published in the Wall Street Journal - The Retreat of Amateur Investors, tells a sad but familiar story of Omar Ghias, an investor who became rich but could not stay rich.
In Moran Housel’s excellent book, “The Psychology of Money,” he talks extensively in chapter 5 about this exact lesson. Much like Mr. Ghias in the Wall Street Journal article, Mr. Housel tells the story of Jesse Livermore, the greatest stock market trader of his day, born in 1877.
By the age of 30, Jessie Livermore has amassed an inflation-adjusted fortune equivalent to $100 million today. Mr. Livermore had a stroke of genius luck on the fateful day of October 29th in 1929; by shorting the market, betting stocks would decline. In that one day, Jessie made the equivalent of more than $3 billion. During the worst months in the stock market’s history, he became one of the wealthiest men in the world.
By 1933 Jessie Livermore had lost it all.
The times were different, but Mr. Livermore and Mr. Ghias have something in common – they failed to learn the same lesson – Getting money is one thing while keeping it is another.
While Omar Ghias certainly didn’t amass the fortune that Jessie Livermore did, his fortune evaporated the same as Mr. Livermore’s by taking on excess risk, hoping to amplify his results, all the while ignoring fiscal responsibility. Mr. Ghias is starting all over, back at zero.
Stuck at home during the COVID shutdown, and flush with stimulus checks, new investors like Mr. Ghias piled into stocks, options, and cryptocurrencies while driving up prices in shares of companies that were once left for dead. It was a recipe for disaster. During an unprecedented equity market run-up in 2021, things quickly unraveled in 2022.
Mr. Ghias’s story, unfortunately, is not unique; investor returns typically are worse than their return from their investments.
What do I mean?
This begs the question: Why did Mr. Omar Ghias and Jessie Livermore, who seemingly had it all figured out, manage to go broke?
Simple – Mindset.
The mindset of getting rich has an entirely different emotional approach than staying rich. The emotional rush of suddenly becoming rich does not lend itself to the slow go of frugality and paranoia required to stay rich.
Getting rich requires taking on risks and having optimism when none exists.
Staying rich requires the opposite of taking a risk. It involves risk aversion and a survival mentality. If staying rich had a motto, it would be, “just because you can, doesn’t mean you should.”
Money is incredibly emotional, yet it’s also one of life’s more essential tools. Money is unique because it’s hard to live with and just as hard to live without it.
Regardless of your relationship with money, there will always be a story Like Mr. Ghias’s. It’s a story that’s as old as time itself that each subsequent generation must learn, no matter how many times we try to teach them – Getting Rich and Staying Rich require different skill sets.
Stay the course, my friends.