A Tale of Arrogance





There is a Cuban saying, which roughly translated means, “Never go back, not even to get a running start.”  If I put on my translator hat and apply it to money, it means, “Once wealthy, your number one objective should be to stay wealthy.”  Where wealthy people make mistakes is in their zeal to become wealthier.  Ask a wealthy person their number one priority.  Is it retirement income?  Is it security?  Is it their children’s or grandchildren’s financial health?  The answer is surprising.  Wealthy people want “just a little bit more.”  Their number one objective is to get wealthier.  This sometimes gets them in trouble.  Incidentally, if you stay wealthy, the result is you will get wealthier.  Another way of interpreting the saying is to focus on what’s right in front of you.  This tale instructs us to focus on what you have, not on what you could have.

Let me digress for a moment and bring up the term hubris.  When I was a boy and was first introduced to Greek mythology, the term hubris meant mortals behaving godlike.  When mortals behaved godlike, the gods would punish them.  They didn’t like it and considered it an affront to their godliness.  Over the years, the term hubris has morphed.  It means exaggerated self-pride, arrogance or self-confidence, often combined with a lack of humility, resulting in fatal retribution.

The classic hubris myth is the one of Icarus.  He drowns when he tries to be godlike by flying to the heavens.  The gods were angry, melted his wax wings and he plunged to his death.  In honor of the Greeks, this tale is the tale of Icarus, but we will call him Ike.  He came swaggering into my office in December 1999 with a “why am I here, I already know everything attitude.”  Upon reflection, I must admit that I don’t feel a bit of remorse for what happened to Ike.  Like others before him, he didn’t listen to sound advice and failed to focus.  I do feel sorry for his wife.  She deserved a better fate.  Ike and his wife were in their late twenties at the time we met.  She had a job with the federal government and he worked for a high tech company that was a darling of Wall Street.  He was in my office because his wife was a friend of a friend and she had insisted that they get someone to review their financial situation.  I could tell immediately he didn’t want to be there, and if I were wiser, I would have handled the situation better.  Unfortunately, I wasn’t wiser then and was not able to help them.  What I saw and heard surprised me.

Ike was sitting on more than $6 million of company stock options that he could cash in whenever he wanted.  In addition, he had cashed in some options earlier that year and through what he called “aggressive short-term trading” and the use of a margin account, from which he borrowed money to buy more than he could afford, had turned $400,000 into $1.1 million.  Other particulars to their situation were that they made almost $200,000/year in income and had recently put a $40,000 deposit on a $1 million plus home that would be completed within eight to nine months.  Life seemed good, and it surely should have been.  However, hubris has no mercy.  What should Ike have done?

I advised them to cash-in enough of his options to ensure that they could pay their taxes in April 2000 and put a large down payment on their house when it was completed.  I also advised him to stop trading his account on margin, to transfer the account over to my management and that I would purchase insurance, through the use of put options, on his company stock to avert a loss with the options that would remain.  What did he do?  The answer is none of the above.  He knew better, or so he thought.  What happened to Ike?

He ignored sound advice and maintained his invulnerability posture.  He kept trading aggressively and held on to his options, sure of the knowledge that they would just keep going up in value.  What happened?  His company’s stock price fell in excess of 95% due to accounting irregularities.  This drop alone wiped out his $6 million in option value.  What else happened?  He aggressively traded his account from well over a $1 million to less than $200,000 by April 15, 2000.  To add insult to injury, when it came time to pay his taxes, he had racked up so many short-term capital gains the year before that his tax bill was more than he had.  Ike couldn’t pay his taxes!  The last piece of news to befall Ike was that shortly thereafter he lost his job and was unable to go to settlement on the house they were building.  Needless to say, the builder kept the $40,000 deposit and sold the house for a higher price.  Could Ike have prevented this disaster?  Absolutely.  But if he had, we would have no tale, and he would not be Ike.

What Ike should have done is listen to the advice that he was given.  He went from a set-for-life situation to a disaster because of his total belief in himself and his company.  Pride has no place in an investment portfolio, and Ike and his wife suffered the consequences.  In his zeal to be wealthier, he forgot the basics.  He forgot to stay wealthy.

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