How he made billions evaporate
The priest made a suggestion. He told him that everything he had taken from the sea had to be returned to the sea. He took the advice very seriously. In a ritualistic gesture, the oil tycoon tossed some gold coins into the ocean to show his gratitude.
The priest sighed. Those coins were worth $185,000. He could have left a least one in the collection basket.
They say the easiest way to make a million dollars is to start with two million. This terrible joke is unfortunately true.
The wealthy lose huge fortunes more easily and frequently than you would imagine. The more you have to your name, the more you have to lose. Quite often it’s not a financial meltdown or brutal economic recession that wipes out wealth. It’s quite often due to a certain mindset, bad luck or a set of poor decisions. There’s a great post I read recently here about a billionaire who lost it all.
If they don’t lose it all in their lifetime, their children can lose it for them. According to a survey by the Williams Group, seven out of ten wealth families lose their fortune by the second generation: they interviewed more than 3,200 high-net-worth families in this study.
History is littered with examples, but here’s one of my favourite stories.
In 1810, Cornelius “Commodore” Vanderbilt borrowed $100 from his mother. He then built a huge steamship and railroad empire with this modest sum. When he died in 1877, he was worth $100 million and was the richest man in the US.
He had mentored his eldest son Billy Vanderbilt to take over and once said to him: “Any fool can make a fortune; it takes a man of brains to hold onto it”.
On his deathbed, his final words to Billy were, “keep the money together”.
Loyal to his father’s wishes, Billy doubled his father’s estate within ten years, creating the largest fortune the world had ever seen. Unfortunately, he died soon afterwards.
In the sixty years that followed an assortment of different Vanderbilts by birth and marriage squandered and squabbled. Their wealth was spread thinner with each successive generation. Lavish parties, race horses and gambling took their toll on the Vanderbilt estate. Monumental Vanderbilt mansions were erected in New York, Long Island and Newport, filled with paintings, tapestries and marble. All of them were eventually sold and the contents auctioned off to cover debts.
In 1973, 120 extended members of the Vanderbilt family gathered for a family reunion. It was shocking. Not one of them was a millionaire.
The trouble was that the Vanderbilts’ wealth was spread thinner with each successive generation. After a while it stopped growing, until finally it shrank thanks to descendants that didn’t appreciate what it took to build this fortune.
One of the most important lessons an investor learns is that wealth compounds. But it only does if you let it.
Poor personal financial discipline can hold you back. The danger is that you get comfortable your wealth and you can’t adjust to a downturn.
The dividends from your investment portfolio might suddenly not be sufficient to support you. And because you never reinvested these dividends, you draw out equity from your investment portfolio. This means your wealth doesn’t grow. In fact, it could even shrink if you can’t control your spending habits.
Another issue is the confusion over the difference between price and value. When the stock market rises, investors see their investment portfolios grow, so they feel wealthier. But they shouldn’t because it’s meaningless, especially if they’re not thinking about selling any time soon.
You see the price the market places on an investment today is unlikely to be what it will be when an investor sells that security. It could be less or more. The intrinsic value you place on it, is much more important. This is where understanding the fundamentals gives you a sense of what it’s worth to you.
If the market crashes and the fundamentals remain intact, it doesn’t matter. The investment hasn’t radically changed just because the market has priced it down due to a bout of collective market fear.
This is a really important point when it comes to assessing wealth. Have a look at the chart below. Wealth has tiers, and these tiers determine a person’s asset allocation.
[US Federal Reserve Survey of Consumer Finances 2016]
The average billionaire’s wealth is predominantly made from business interests. The size of these business interests is often determined by the stock market’s valuation.
This means that a market correction can see billions evaporate from a billionaire’s personal portfolio. When you see this happen, you wonder whether that wealth was there to begin with.
Of course, the differentiator here is quality.
Warren Buffett quite frequently takes a multi-billion dollar hit to his wealth when markets turn south. However, he usually sleeps well at night, safe in the knowledge that he understands the true worth of what he has invested in.
The oil tycoon at the beginning of this article, however, probably had many sleepless nights when he was in prison. Eike Batista was fortunate enough however, to be released in April 2017 and remains under house arrest.
At his height in early 2012, he was worth US$32 billion and ranked the seventh richest man in the world. But, by July 2013 his wealth had plummeted to US$200 million.
Nicknamed Dr PowerPoint, he told investors that his Óleo e Gás Participações (OGX) oil company would pump 750,000 barrels of oil a day. It only managed to pump 15,000.
His decline was exacerbated by the huge amount of debt he had incurred, not helped by chucking gold coins into the sea. He actually admitted to Forbes magazine that he was worth a negative one billion dollars, which would make him the most indebted man on Earth.
I bet now he wishes he kept the change.
