Miss Universe
In 2015, comedian Steve Harvey made a BIG mistake.
Harvey was hosting the Miss Universe pageant, when the whole kerfuffle took place.
The envelope said, “First run up: Miss Columbia,” but the words Harvey would utter next wouldn’t be soon forgotten, “Miss Universe 2015 is … Colombia!”
The music. The crown. The sash. The announcement. The whole routine and tradition took place for… the wrong winner. Harvey with his classic smile until he realized, “Whoops!” On live television, he had to tell a full house and an entire television audience that the actual winner was Miss Philippines.
EM. BAR. RASS. ING!
The best part? Steve Harvey’s closing comment, “It was still a great night!”
Funny enough, Harvey was indeed invited back as a host.
Unrecoverable
Some mistakes are unrecoverable, whether that be social or financial.
Harvey’s misstep is so uncomfortable to watch, you can cut the awkwardness with a knife. Yet, Harvey recovered, regardless of how incredibly awkward it was. Some financial mistakes can set investors back, back to a place that can be unrecoverable.
Today, we will unpack high-level mistakes in concentration, panic, big losses, and what I like to call tax magic.
Concentration
Some of the wealthiest people in America accumulated their wealth via heavy concentration – ownership in one single company that dominates their personal balance sheet. They founded a successful company and allowed their ownership (stock) to grow hand-over-fist for an extended time period. This is the power of compounding, accelerated by some out-of-this-world rates of return.
This was/is true for Elon Musk, Mark Zuckerberg, Warren Buffett, Jeff Bezos, and Bill Gates, just to name a few. We know these names because these individuals were the exception, not the rule. They took big risks, which resulted in a big payoff.
We have a saying in our business that concentration may create wealth, but diversification preserves wealth.
When I first started in this business, I worked for one of the major financial service companies. It was a great experience, and I met some amazing people. This particular company had a history of acquisitions, so many of my tenured peers had a stack of business cards with varying logos. One friend kept coffee mugs in his office of the different companies he used to work for – again, same place, same building, just many new names through years of acquisitions and mergers.
One of the wise sages in this office really took an interest in me and would often go out of his way to provide some guidance and tribal knowledge. He also shared with me his personal journey and one of his big financial mistakes. His 401(k) plan had grown rapidly because he had concentrated his investment into just company stock. The portfolio grew faster than he could’ve ever imagined, and he became enamored with the company and all the positive talk he heard around the water cooler. This was his entire plan for retirement, and he could never bring himself to diversify this stock that had brought him such success. In 2008, this stock (this company) found itself at the epicenter of the Global Financial Crisis, and the stock value plummeted 97%. Even years after all the damage, the stock never really recovered. The stock chart, even today, just looks like a run up to a peak that drops off a cliff and just muddles along a flat road from there.
A simple example of how concentration can destroy wealth.
Panic
One of the most difficult things about investing is what to do when it feels like the world is falling apart. Those moments are the tech bubble bursting at the start of the millennium, the Global Financial Crisis of 2008, the start of the COVID moment in March 2020, etc. Those times when negative headlines dominate your thought life AND you watch stock prices get cut in half. These moments are so incredibly hard.
True financial planning is made of two main functions – the creation of a viable plan AND the execution of that plan. These moments I am referencing really challenge that second phase of financial planning. Yet, sticking to the plan may be the difference between success and failure.
I will note here that no plan is written in permanent ink or etched in stone tablets. The plan is a guide, a direction, a North Star of such, but the plan is clay that should be molded and adjusted to the ever-changing landscape of your life. We call these pivots, little adjustments and modifications to accommodate a new variable.
From an outsider’s perspective, a lot of attention and emphasis is placed on the science behind the creation of a plan. The math, the strategies, the projections, the assumptions, etc. From the perspective of a practitioner, we place a lot of emphasis on investor behavior and one’s ability to stick to a plan. Why? Because we’ve seen some stuff. We are on the other end of that phone call when someone wants to move all of their investments to cash because they were disappointed in an election outcome. Fear and panic are cancerous, they can destroy a well-built plan in a single moment.
One particular memory comes to mind. My client, a business owner, was personally feeling the full impacts of the pandemic in 2020. He was forced to shut down his business for an extended period of time; he worked in an industry where he served his clients in close contact. It would be a while until he was allowed to reopen his doors. This created elevated levels of anxiety and a lot of free time to think and dwell, which are often the key ingredients for panic.
Then, I got the phone call. It was an I-am-not-sure-I-can-endure-this-much-more call. He was capitulating at the bottom of the market and simply wanted to sell it all. He was a client, but as often happens, he was a friend; he was family. I’d served him for years and knew his background, his kids, his aspirations, etc. I told him, as a fiduciary, someone acting in his best interest, I just couldn’t advise him to execute on this panic. Ultimately, it would be his decision, as it was his money, but I leaned into the trust I’d earned over the years and guided him back to his plan. He was reluctant, but he agreed, and we stayed the course. About a year later, the landscape was looking much different, and we were seeing the light on the other side of COVID. In our annual review, I went over the monthly investment performance following that conversation and highlighted the financial benefits he gleaned from his willingness to endure.
Panic nearly destroyed my client’s financial plan.
Big Losses
I was recently meeting with a couple that was referred to me and we were discussing our group’s philosophy and our approach to investment management and financial planning. He had been a long time do-it-yourselfer which resulted in some meaningful wealth accumulation, but recently he had made a few investment and tax planning missteps. With that experience fresh in his mind, he was ready to potentially seek some help from an advisor.
We walked through our approach, and I gave some hypotheticals to provide context behind some of the ways we could help. It was a good conversation with a lot of healthy Q&A. One particular question stood out to me; he asked if we could take half of his portfolio and implement things just as we normally would, but then he wanted us to “take big risks” with the other half of the money. Honestly, this inquiry shocked me, and I was confused as to why this would even be considered.
In hindsight, I think I understand where this framing came from. In the past, he’d taken some big risks in the real estate market. Stretched himself with debt (borrowing) and favorable real estate markets had created a big payoff. He wanted to copy/paste this experience. It reminded me that people don’t often compute the impact big losses can have.
For me, this little illustration helps. The rule of 72 says that we can easily compute what rate of return we need to double our money by simply dividing 72 by our desired time period. So, to double your money in 10 years, 72 divided by 10 is 7.2 which means you’d need roughly a 7.2% average annual return. Now, let’s imagine you did just that. Your $500,000 investment grew at 7.2% per year for 10 years, and now you have a million dollars. Then, unfortunately, in the 11th year, your return is -50%. What just happened? One big loss in one year just erased a decade of meaningful compounding returns. Big losses can be absolutely destructive.
For some reason, sometimes – not always – our brains can get stuck in a mode of could-you-imagine-if. We start to daydream about finding that lottery ticket investment and how everything could change in a moment. We tend to fantasize about big wins but forget how detrimental big losses can be.
Simple financial advice here, but you really want to avoid those big losses. I can’t tell you how many people I’ve met that gambled on a small investment in this start up or that downtrodden currency or a bought into a multilevel marketing scheme thinking it would result in a big payoff. In nearly all of these cases those dollars invested vanished never to be seen again.
Again, big losses are hard to recover from – financially and emotionally.
Tax Magic
For me, I categorize tax magic alongside Big Foot, UFOs, and Nessie, the Loch Ness Monster.
There is a belief out there that tax magic exists. A hope that one will find a way to instantly reduce their tax bill in a simple and meaningful way. Sure, there is often some basic planning and ways to clean up strategies/executions to improve the tax impact, but there is no tax magic. I don’t care what your friend told you or what you heard from Uncle Bob at Thanksgiving. If you try to execute something that feels too good to be true, that tax magic will come back to bite you in the rear.
I’ve seen investment strategies touting instant pass-through losses. I’ve seen people forming entities for businesses that aren’t businesses. I’ve seen, I’ve seen, I’ve seen. I’ll let you in on a little secret, though, I too would be VERY interested in a legal strategy to significantly reduce my taxes. Also, I have a front-row seat for a lot of different tax planning meetings, and this often-sought-after tax magic simply doesn’t exist.
Unfortunately, I’ve also seen the financial and emotional headache unwinding a harebrained tax scheme can create. It’s never worth it. I will reiterate that there are tax planning strategies, even some with complexity and nuance. Tax magic is those that just smell fishy – they smell fishy to me, they smell fishy to you, but for some reason, you just want/need to believe that it’s kosher. Again, never worth it.
Tax magic just simply doesn’t exist.
Avoiding Big Mistakes
Making big mistakes can serve as a great lesson. The key ingredient to wisdom is experience. Yet, it can be extremely beneficial if you can try to learn from others’ mistakes. Many have come before you, and many mistakes have been made. Heed the wisdom of history, my friend.
Today I was able to share a few categories of big mistakes (concentration, panic, big losses, and tax magic), but in reality, this list is much much longer.
It’s often the big mistakes that create the setbacks that feel insurmountable. Avoiding these at all costs is ideal. Big mistakes are like mosquitos, always on the prowl to suck the life out of investors and leave an itchy irritation in their trails.
I hope today’s overview and anecdotes are helpful. As I often say, investing is hard enough, it’s best to not make it more difficult than need be. Simple, right? Just avoid the big mistakes 🙂
PWA Group Director, Partner
tcummings@thebahnsengroup.com
