The Wisdom to Show Restraint
- Mark Biller Sound Mind Investing
- 2011 5 May
"Do not wear yourself out to get rich; have the wisdom to show restraint. Cast but a glance at riches, and they are gone, for they will surely sprout wings and fly off to the sky like an eagle."
— Proverbs 23:4-5
Recent financial news has been filled with stories of rich people behaving badly. Consider the following examples from the past two months:
• On April 6, the U.S. government rested its case of alleged insider trading against Raj Rajaratnam. Rajaratnam was the 236th richest American in 2009 (estimated net worth of $1.8 billion) and his Galleon hedge fund was one of the 10 largest in the world at one point. Also charged as part of the case were a director at Intel and a top executive at IBM.
• On March 1, the SEC filed insider trading charges against Rajat Gupta. Gupta was the managing director (CEO) of the global consulting giant, McKinsey & Company, for nearly a decade before retiring in 2007. He has been a board member or advisor to Goldman Sachs, Procter & Gamble, American Airlines, and Harvard Business School, as well as serving as a special advisor to the Secretary-General of the United Nations. He is charged with passing insider information to Rajaratnam — the two were caught discussing confidential Goldman board meetings in an FBI wiretap as part of the Rajaratnam case.
• On March 28, David Sokol, viewed by many as the heir-apparent to succeed the legendary Warren Buffett at Berkshire Hathaway, abruptly resigned. Briefly summarizing, Sokol personally bought shares of a company that he then recommended Berkshire acquire. When Berkshire subsequently acquired the firm, Sokol pocketed roughly a $3 million profit. While that's big money to normal people like you and me, it's a pittance for an investor like Sokol who was likely worth hundreds of millions already.
By now, we've all heard the story of Bernie Madoff's infamous Ponzi scheme. But did you know Madoff earned as much as $100 million a year from the legitimate part of his business before his Ponzi scheme began?
What makes people who already enjoy fabulous wealth risk everything for a few dollars more? I don't understand all the reasons, but I believe the Proverb near the top of this page holds one important key to this puzzle. Some individuals never learn restraint. They never learn (or decide) what is enough. And while it's tempting to sit back and shake our heads at these "foolish rich people," it's worth asking ourselves how we're doing by that same measure.
A decade ago, many middle-class workers in the tech industry watched small fortunes evaporate as their once richly-valued stock options plummeted with the market. More recently, many builders and real estate investors have followed similar riches-to-rags storylines.
Regular investors can easily fall into the same trap of blowing right past restraint en route to imagined future riches. Here are a few tips to help check that impulse.
• Carefully assess your risk tolerance, then don't exceed it. Your stock/bond allocation is the most important investing decision you make. Also recognize that high-risk, high-reward strategies can be useful in moderation, but dangerous when restraint is abandoned.
• Don't take more risk than is necessary to meet your goals. If you've been blessed to be in position to meet your retirement goals with a less aggressive investment plan than you once anticipated, rejoice — then dial back your risk! The object isn't to build the biggest nest egg possible. It's to be a good steward and be able to provide for your future needs.
• Don't overestimate your employer's prospects. Holding too much company stock, often because you're a true believer in your company's prospects, is a common pitfall. Wisdom acknowledges that something could go horribly wrong at your company, as has happened to many others before. Show the restraint to properly diversify.
• Set an ultimate "finish line" — the level beyond which you have all you need and can give the rest away. Setting a finish line — and scaling back risk when it is reached — can protect you from sacrificing things you truly treasure (financial freedom and security) in pursuit of what you no longer need (more dollars in an investment account).
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