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. But 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 can't I'll have to 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, 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 if 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 without
thinking about it, Barry. There was a great book, it was a 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 to 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 29th, 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 their 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 bett 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 now 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
predict 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 3 pm 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 Moritz, 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 their secret was. And Moritz 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 Moritz 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 Moritz.
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. Ten 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 all together and then Rick kind of disappeared.
At least relative to what Buffett and Munger became eventually. Many years ago, there's a hedge fund
manager named Monash Brigh 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 the 1970s, 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 Pabri 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 Pabri, 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 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 two, 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 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 do, 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 that 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, but 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 three 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 a 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 of the stock market or of your career is up into 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 were 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. Four 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 can 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.
