Fortunes & Blunders: An Introduction

The Money Challenge

Love them or not, most of us are fascinated by the rich and famous. We follow them on Instagram, Twitter and other social media. We follow every step and every move they make. We might be in awe of their success, but we are even more amused by their failures. Whole gossip magazines are filled with their private blunders, affairs and in some cases dramatic endings. Surprisingly, given this, we actually learn very little from them especially when it comes to the topic of money.

Whether we like it or not, money dominates our lives.  There is not much that does not require money. The decisions we have to make in this regard are not always easy. In fact, they can be nerve-racking Yet, so little is done to improve our financial knowledge. So little is taught in our education systems, starting from elementary school and right through to University We are reluctant to discuss the subject even with our families. Talking about money is frowned upon – having is not.

It’s a common problem throughout different generations, gender and social classes; worldwide, throughout history – it’s the same pattern over and over again. This is as astonishing considering that making and managing money is arguably one of the most fundamental responsibilities in our lives. At least to most of us.  And if you are reading this book, I am guessing that it is to you as well. From investing in our education to getting married and raising children, building a home for ourselves and thinking of retirement. Consider all the consumer goods and services we crave to buy throughout our lives. The smartphones, clothes, cars and various travel experiences we would like to go on.

The reason behind this book is to address the problem we have with money.  To tackle the learning that we need to maximize our potential and to do so by looking at the lives of those who often have the most…and can lose the most.

The Wrong Role Models

In recent years, thanks to free media and the internet more and more of us have sought to familiarize ourselves with the personalities from finance, fame and money. Many good personalities have emerged.  But also, a number of bad.

Our first instinct is to look at people who are professional money managers, those who manage billions of dollars for others day in and day out. When we watch Bloomberg or CNBC – we see ivy league trained MBA money managers,  men and women who manage billions of dollars with a push of a button.  They talk in a language that sounds distant and unfamiliar to most of us – in a language that could stem from another planet. I would argue the knowledge and wisdom they proclaim has very limited application to the average Joe, those without finance degrees or special sales training.

The stars of Wall Street (those Masters of the Universe), Hedge fund managers, such as George Soros or Ray Dalio, are the modern-day heroes. But frankly, what can we learn from a person who manages billions for others. What can we learn about their macro trading strategies, elaborate hedging operations and mind-boggling financial leverage they deploy every single day.

I admit, no one has taught me more about money and investing than Warren Buffett, his mentor Benjamin Graham and co-partner and co-chairman Charlie Munger. Just reading their publications, seeing their interviews beats any training in commercial banking or degree in finance. But as fascinating as their financial lives might be, the lessons we can learn from them are, to be honest, limited. Not everyone can be like Warren Buffett or Charlie Munger: rational, intellectually superior and without any obvious character flaws. Not everyone can follow the mechanical ways of investment as Benjamin Graham had practiced.

There is also a new breed of money management. This is a  trend towards computerized and fully automated trading and money management. These new masters are physics and mathematics PhDs; they are (sometimes literally) rocket scientists. This new trend has also manifested itself in retail money management. Firms such as Betterman Investment or Wealthfront offer fully automated investment management products. But even simple index funds and ETFs offered by giant asset managers such as BlackRock and Vanguard demonstrate the new trend. Money management has become a sort of faceless person – passing over responsibilities to computer programs and fast trading executions.  Have you ever heard of Gerry O’Reilly? A man who commands $800 billion of assets at Vanguard’s Index Fund operations.^[1]

But what can we learn from highly technical computer models that buy and sell decisions automatically, in a fraction of a second? Algo trading strategies, double butterfly option with delta 0.5 and implied volatility of 15% – tested through Monte Carlo simulation or intricate VAR correlations (Value at risk) –not much! There is certainly something good about this trend – lower fees and more transparency – but the learning value for us as individuals is virtually zero unless we count transferring our money on a monthly basis using a standing order as a learning experience.

Then there are new financial heroes of social media. Who doesn’t know about TV personalities such as James Cramer and his relentless rants?  Or James Altucher, who lives in a pseudo world of financial fantasies and make-believe. Bizarre sounding recommendations for investing in cryptocurrencies and other hot pot investment ideas – of course, all in record time, without any effort. Snake oil businessmen have a new face in the age of social media: Curley hair with spectacles or no hair at all.

Many of these money leaders entertain just through their outrageousness. Unfortunately, humans, with our strong herd instinct, tend to go for the individuals who scream the loudest or make the most outrageous claims – many times with fatal consequences. Follow them on your own peril.

Like anything in life choosing the right role models is not easy – especially when it comes to the topic of handling money.

***TO BE CONTINUED

Fortunes and Blunders: 5 Money Lessons from the Rich and Famous

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