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It's very easy to waste huge amounts of money. Just ask the descendants of America's wealthiest people.
In 1900, there were approximately 4,000 millionaires in the United States. If a family had $5 million at the time and invested it passively in the broader U.S. stock market and spent it reasonably (about 2% of their assets each year), he would now have $16 billion. You own dollars. If her quarter of those families did the same, there would be approximately 16,000 millionaire households today.
However, there are only about 730 billionaires in this country. According to Forbes, very few people inherit wealth that has been passed down through generations over many years. In fact, less than 10% of the current billionaires list is descended from the first Forbes rich list published in 1982.
So where did that money go?
says Victor Haghani, co-founder of the asset management company. Elm Partners attempts to find out in a new book, “The Missing Billionaires,'' co-authored with colleague James White.
The answer lies in the way people invest, says Haghani. They usually focus too much on which stocks to buy and sell, and not enough on how much to sell for.
Mr. Haghani has first-hand experience. In the 1990s, he co-founded Long Term Capital Management (LTCM), which took Wall Street by storm and averaged 30% annual returns.
Until he wasn't.
In 1998, as the Russian crisis erupted, highly leveraged LTCM lost $4.6 billion in less than four months. The Fed assembled executives from the world's most powerful banks and orchestrated a $3.65 billion recapitalization of the fund, which was ultimately liquidated in 2000.
Haghani spoke on CNN's “Before the Bell” about how individual investors can learn from their own past mistakes, and what they can learn from the mistakes of America's richest families.
This interview has been edited for length and clarity.
before the bell: 25 years later, wInvestors can still learn Will we learn from the collapse of LTCM?
Victor Hagani: What matters is this question of how much risk to take. In investing, he has to make two decisions: what he wants to sell, what he wants to sell, and how much he wants to sell or buy.
LTCM made a good investment, but the question was, “How much?” The questions were wrong – there were too many of them. If you're thinking, “What?” The decision was wrong, and even if the sizing decision was correct, it's still a bummer and you'll end up losing money. However, you can still continue and find better investments.
If you are asked “How much is it?”, then the decision is wrong, it is fatal. LTCM is a great case study in that regard.
How did American royalty make the same mistake?
Cornelius Vanderbilt died in 1877, leaving $100 million, and left $95 million to his eldest son. By the 1950s, Vanderbilt didn't even have a millionaire. That's pretty incredible.
But it's also very typical, which brings us back to this “How much?” question. The investment environment over the past 125 years has not been better. It was hard not to invest in something that would yield a positive return. But people made the wrong size decisions. They took too much risk in their portfolios, most often by focusing on too few things and not diversifying enough.
Let's say I guarantee my investors an average annual rate of return of 5%. Every year there is volatility. One year it's up 35%, the next it's down 25%, but over the long term it evens out to 5%. That sounds like a great deal, but the risk starts to eat up the return.
Let's say you invest $100 and get 50% back in one year. The next year you lose 50%. The average return is zero, but the actual assets he has decreased to $75.
That risk will erode compound returns. Although LTCM's average return was positive, in 1998 he experienced a 90% loss and lost almost all of his capital.
These royals also made poor spending decisions. They set up what seemed like a sustainable spending policy at one point, but then the world changed, the value of their investment portfolio went down, and suddenly that spending was no longer appropriate for the level of wealth they had. I did. . When that happens, the loss of wealth is rapid.
The lesson here is that properly sizing investment risks is critical when it comes to the long-term sustainability of your lifestyle and spending.
So how do you decide how much risk to take?
The fundamental objective is to maximize risk-adjusted outcomes, but some people are more risk-averse than others.
You need to think about the expected returns that the market offers, what level of exposure to risky assets makes sense for you, and what level of spending will sustainably support you for the rest of your life. If you want to leave money to your kids, that's more.
What else can we get from these lost billionaires?
I don't think anyone can imagine that families that are very wealthy today will not be wealthy in 50 years. But his next 50 years will be different. Human nature tends to make people take too many risks and spend too much, and the same pattern is likely to occur in the coming decades.
After all, the only thing we can do with our wealth is spend it or donate it. And redistributing wealth over time is probably good for society.
Writers Guild and studio reach tentative agreement
My colleagues Chris Isidore and Oliver Darcy report that major film and television studios and writers reached a tentative agreement on Sunday.
The Writers Guild of America announced Sunday evening that the deal was finalized after days of marathon negotiations, clearing the way for an end to a historic work stoppage that has frozen production and paralyzed much of Hollywood. announced.
“Everything we've won in this deal, especially since May 2nd, is that these members are willing to use their power, to show unity, to stand together, to endure pain. “We owe it to the will and uncertainty of the past 146 days,” the WGA said in an email to members on Sunday. “The impact generated by your strike, combined with the extraordinary support of our union, was what ultimately brought the company back to the deal table.”
Terms of the agreement were not immediately known.
The agreement still needs to be ratified by WGA members, who represent more than 11,000 writers, but it marks a key turning point in the nearly five-month strike. The strike came close to breaking the longest strike in WGA history, the 1988 strike that lasted 154 days.
“We can say with great pride that this agreement is an exceptional one that provides meaningful benefits and protections for writers across all sectors of our membership,” the WGA said in a message to members.
China's exports of two rare minerals essential to semiconductor manufacturing dropped to zero in August, CNN's Laura He reported.
This comes a month after the Chinese government imposed restrictions on overseas sales citing national security reasons.
China produces about 80% of the world's gallium and 60% of germanium, according to the Critical Materials Alliance, but it sold none of the elements on the international market last month, according to Chinese customs data released last week. There wasn't. In July, the country exported 5.15 tons of gallium forged products and 8.1 tons of germanium forged products.
The curbs signal China's apparent willingness to retaliate against U.S. export restrictions despite concerns about economic growth as the technology war simmers.
