The investor who crashed but ended wealthy

I have a large extended family. My mother has ten siblings. My father, six. Out of eighteen people (including my parents), only two are financially well-off.

The first arrived in the United States without knowing a word of English. She was not a bright student. She struggled in a work-study program paying below-minimum wages. She eventually built a significant manufacturing operation employing near fifty.

Yet it is the second relative with the more interesting story. I’ll call him V.

V was expelled from school because he got into one too many fights. He then worked in his father’s (my grandfather’s) small hardware store, and later delivered eggs for a farm. His fortunes turned after his tiny startup capitalized on the explosive growth of jeans. He supplied the then-unique fabric to manufacturers. He even timed the sale of his controlling stake at peak valuations. By any measure, V was no longer poor.

This was when his problems began.

Armed with abundant capital for the first time, V started “investing”. He speculated in currencies, stocks, and derivatives, with a rudimentary understanding of finance. His frequent and enormous trades summed to hundreds of millions in turnover, attracting brokers of all sizes. The more shrewd and cunning suggested trades that he could never understand. They explained that the trades were exclusive to a select few, and that profits were virtually certain, but not when and how. V never stood a chance against Wall Street.

V took five years to build and sell his startup. His account took less than half that time to be down 120%.

V should have been in utter financial ruins. An otherwise tepid transaction, suggested by his wife, not only saved V from ruin, but also generated profits enough to make him a millionaire many times over.

His eldest son was born shortly before the sale of his startup. In planning for the family’s future, his wife suggested that they plant roots in the neighboring country of Singapore. This was the late 1970s, when the majority of Singapore was rural and unsewered (I urge readers to learn what unsewered is to appreciate the miracle that is the modern sewage sanitation system). V was flabbergasted. To leave the familiar for a wasteland (pun intended) was absurd. His wife was insistent, believing that the public school system in Singapore, however undeveloped, was better than what her country offered. V, with little formal education, did not understand her perspectives, but gave in out of respect. The young family eventually migrated to Singapore. V used some proceeds from the startup sale to purchase land and real estate in the new developing country, and allocated the balance to his trading account.

In 1978, Singapore’s GDP per capita was about $3,200, roughly a third of the United States’. In 2018, the same measure for Singapore had grown 20-fold and exceeded the USA by about 3% (The USA grew the measure by about 6-fold in the same period).

So how did real estate in Singapore performed? About a 22-fold increase. V’s returns are likely much higher because of leverage and favorable exchange rates. By rough calculations, his returns were at least 60-fold in USD terms, considering a 50% down-payment (interest rates exceeded 10% in the late 1970s, so buyers tend to place large down-payments to reduce interest payments) and a 70% appreciation of Singapore versus US dollars (meaning that one Singapore dollar today buys 70% more US dollars than it did).

A few takeaways:

1 – Success is not transferable. What made you successful in one game does not directly make you win in another.

V was a sharp operator before indulging in securities. He knew exactly how machines are running, and what his suppliers, customers, and employees expect. His skills did not translate directly to trading. Only his confidence and ego did.

As an operator, constant action was the norm. V was always on his feet, inspecting machinery and talking to people. He thought he had to do the same in trading. He could, but he didn’t have to. His skills may had worked if he were a tape-reader (ie the quintessential intuitive trader), but results certainly showed he wasn’t.

You have to understand your strengths at their core, in order to know what to work on and how to work in the unique way that caters to your strengths.

To work in a certain way, just because your peers do or some successful person says so, ensures disappointment.

2 – When you have capital, the right thing to do mostly is nothing.

Warren Buffett once quipped “I make mistakes when I get cash. Charlie tells me to go to a bar instead. Don’t hang around the office.”

Investing is akin to a baseball game with infinite pitches. You only have to swing at those which assure home-runs. You have to know your sweet spots. Every investor has unique backgrounds, knowledge, and by extension, sweet spots.

Home-runs are rare by definition, so the investor should behave similar to the batter who watches many pitches pass and does not swing. Yet the batter must always be prepared to swing at a moment’s notice.

Wall Street gets paid when the batter hits the baseball. Every hit on the bat is a commission, so WS throws as many pitches as possible in as many ways as possible to entice investors to swing their bats. WS does not care whether the batter hits a dud or a home-run.

WS makes it difficult to do nothing when you have capital, but nothing is exactly what you mostly have to do.

To be fair, real estate in Singapore is not V’s sweet spot. However, V is likely to understand where and how to buy a home for his family, more so than when to buy and sell complex securities. V’s home-run in real estate obscures an important but subtle point, which brings us to the next takeaway:

3 – Home-runs are not short-term large returns, but are really long-term moderate returns.

A 60-fold return is significant. Over 40 years, it equates to 10.8% per year. The annual returns do not appear significant relative to equity indices. The S&P 500 reached a bottom in March 2009, and returned 16.5% per year between then and now (with dividends reinvested).

The secret is not in the annual returns. It is in the duration.

Over a long-enough time frame, even moderate returns can achieve astonishing results. Committing to the investment, through large and small downturns, is essential but counter-intuitive. It is a characteristic that V had help on, which leads to the final takeaway.

4 – Marry the right person, and have reasonable expectations.

Investors take pride in sticking to cold, hard facts. But investing is predominantly a human activity. The cold, hard facts underpinning decisions are selected by bias, which contains an emotional element. Trading algorithms, designed to be emotionless, are designed by emotional humans.

This means that human psychology matters.

Just knowing about home-runs is insufficient. You have to know how to emotionally stick to the strategy producing the home-run.

Judging from V’s trading, I am certain that he wanted to sell the real-estate in Singapore after a certain level of appreciation. One who trades in minutes and hours does not have the patience to invest for months and years, let alone decades.

I am almost certain that every discussion V had with his wife about selling, he was persuaded otherwise. His wife loved the home that was built from scratch, the large yard, its polite neighbors, proximity to great schools and public transportation etc. On top of those, the home and land values appreciated almost every year.

In all fairness, V’s wife knew next to nothing about investing. Singapore real estate was certainly not her sweet spot. However, that she could stick to a home and its surroundings for more than 40 years is telling of her reasonable expectations (she does not want or need a bigger house) and stable sense of contentment. The average American, contrary to V’s family, moves 11.7 times in a lifetime (Singaporeans about a third as often).

Reasonable expectations allows one to stick to a strategy, through thick and thin, for the long-term. It is not the same as being ignorant. Quite the opposite. It is being aware of the facts, and the understanding of the futility of reaching for the very best returns when the present works fine.

Contentment, the act of not reaching for more, is the paradoxical key to get more, because it results in long-term duration that underpins astonishing returns.

Marrying the right person can do wonders for the psychology of contentment. After V saw his trading account wiped clean, he never traded again for short-term profit, likely at the behest of his wife. His wife constantly reminded him to appreciate the present, which offered a higher standard of living by any measure relative to their lives before moving to Singapore. V’s appreciation for the present grew gradually. As his brokers pay less attention to him, he eventually sold all his luxury jewelry and watches, and traded his Mercedes for a beat-up Honda van. The less he owned, the more contented he became.

The Oracle of Omaha said the following about reasonable expectations. It is no wonder that he achieved the rare combination of being wealthy, contented, and in all likelihood, happy.

I was going to do the same things when I had a little bit of money as when I had a lot of money. If you think of the difference between me and you, we wear the same clothes basically (SunTrust gives me mine), we eat similar food—we all go to McDonald’s or better yet, Dairy Queen, and we live in a house that is warm in winter and cool in summer. We watch the Nebraska (football) game on big screen TV. You see it the same way I see it. We do everything the same—our lives are not that different. The only thing we do is we travel differently. What can I do that you can’t do?” -Warren Buffett