Recently I was golfing with a friend of mine and his Dad. His dad runs a large local company and works with one of the big bank private wealth teams in the city. He asked me whether a specific small cap stock his advisor put him in recently was a good idea or not.
These questions put me in a very precarious situation and I almost always try to answer them the same way…
“Without knowing your risk tolerance and financial situation, I can’t say whether I think the stock is a good investment or not.” Yawn!
Unfortunately for his big bank advisory team, I had read a Warren Buffett Q&A with a group of MBA students at the University of Maryland the day before and I forgot my typical answer on the previous hole.
I decided to share buffets opinion on financial sales people – his bank advisory team – and why rich people should work harder on staying rich.
Buffet was asked in the Q&A what the most important skill in finance is:
“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 where Buffett mentions sales is very accurate. It’s something that I must admit I struggle with every single day as someone who’s building their business. However, being aware of this fact makes me very adept at recognizing sales tactics.
Being rich is a fantastic problem to have but is an incredibly difficult thing to maintain.
My Advice to him was as follows:
- Don’t invest in something you can’t explain in 140 characters or less. If you can’t break it down simply and understand it, you’re likely making a mistake buying it.
- If it sounds too good to be true, it probably is.
- If you’re already wealthy, you should overweight the need side of the Need/Risk equation. Elon Musk would tell you otherwise. But I suppose he’s going to wish he took that advice if and when Tesla crashes.
- Avoid concentrating your investments into one huge investment.
- Don’t worry so much about what your friends and colleagues are investing in and focus on the needs of your family and your situation; this is generally one of the hardest things to do, especially in this day and age when everything is immediately visible.
- When it comes to investing, boring almost always trumps exciting. There’s little need to make wholesale changes when things aren’t immediately going your way. Jealousy is not a trait of a strong investor.
- If you’re reaching your later years career wise, take that into consideration when you’re pushing all-in on an idea. Human capital and time are the most important consideration when considering your timeline and risk profile.
I do understand the desire to take risk as an investor and entrepreneur. This is especially difficult for those that have had so much success taking risks with their businesses. Changing your behavior from risk on to risk management is a difficult thing to do and the fear of missing out is a difficult feeling to suppress.
Risk and reward can be summed up in several ways and stories, but none ring truer to me than the story of Jesse Livermore.
In conclusion:
Many serial entrepreneurs such as Elon Musk and Jesse Livermore can and do get rich twice, but I’m with Buffett on this one:
“Why risk what you need and have for what you don’t need?”
If you’ve already won the game, why risk everything trying to it win again? seems irresponsible to me; then again, I’m not in the “1%” and I’m merely agreeing with one of the world’s foremost minds on investing.
Don’t make yourself get rich twice. Find a team that is capable of managing your family’s financial situation properly.
If your financial advisory team is investing in high priced mutual funds and moonshot stock picks, I recommend you give the GIM Team shout.