Paul Winkler: And welcome, this is “The Investor Coaching Show.” I am Paul Winkler. Talking about the world of money, financial planning, retirement planning.
Interesting. I was actually watching a video, reading an article, and I thought, “Ooh, these two go together.”
It’s like that commercial where the guy’s walking with chocolate and the other person was walking with peanut butter. They run into each other: “Ooh, we’ve got something here, putting two things together.”
Yeah, you can come up with some pretty good results when you put two things together sometimes.
So this article was about mistakes that rich people are always making with their money.
Now, I don’t know. Sometimes when I see “This is always happening!” or, “This never happens!” — extreme thinking.
“Extreme thinking is always bad.” I could make that point, right? Yeah.
Nobody always does anything, right? Sometimes there are exceptions to the rules, and that’s what you got to find.
But anyway, I might’ve reworded it, “Three mistakes that rich people often make with money, according to planners.”
“Having money and managing it well don’t always go hand in hand.”
And I’m going to actually combine this with something I saw. It was Malcolm Gladwell, who’s a good writer, phenomenal writer actually.
He came out to a conference I was at a few years ago. Really interesting guy, has got some great books out there, “Tipping Point.”
And there’s this whole book on “Outliers” and fascinating stuff that he’s done work on, just really interesting reading.
But anyway, he had a video that he put out, and it was on another book that he had written. It was on “Talking to Strangers,” another really super interesting book.
But he was talking about the thing that we should know about people that we probably don’t know. Things that we ought to know that we don’t often know about people.
And I thought, “I’m going to combine it with this one, because this is really, really interesting.”
Rich people typically make some mistakes. A lot of times in areas that you wouldn’t think that they would make mistakes.
The First Mistake: Spending Too Much
And number one, he said, this article was talking about how … this is in “Business Insider.” And there are three common mistakes.
One is “Spending way too much.” It said, “Between lavish homes, luxury cars, pricey country club memberships” …
Now this isn’t always the case, obviously, because if you read “The Millionaire Next Door,” they actually show that the typical vehicle or most driven vehicle by millionaires isn’t a lavish luxury car.
It’s actually a … well, back when they wrote it, it was a Ford F-150 pickup.
But if you look at wealthy people, a lot of times they don’t drive really fancy vehicles. The people that drive really fancy vehicles are often broke, and they have a lot of debt, and they don’t actually have a whole lot of money.
But this is the typical vision that we have of wealthy people. They live in these gorgeous, huge homes. And they drive the most beautiful cars, and they are in these wonderful country clubs.
But this is why a lot of times rich people end up not so rich. Because they do these types of things. And I would agree with that point right here.
Now there are endless things that “could tempt you to spend your cash,” the writer says, and apparently interviewing, maybe, a financial advisor friend for this particular article. This person keeps getting referred to in here.
And it says, “The problem gets even bigger when they think they have enough money to retire early.”
A Long Retirement Will Require More Savings
Reminds me of that FIRE movement. Financially Independent Retire Early, I think, is what it stands for.
And the idea — you can build up a ton of money, and then you can retire. And then you’ve got … maybe you retire when you’re 35, and you might have 60 years ahead of you to make sure the money lasts.
And that could be kind of dangerous, especially if you’ve gotten an advanced degree in something, and 20 years later, you realize, “Maybe I don’t have enough to retire, or maybe my investment prowess wasn’t exactly what I thought it was going to be.”
And now you have to go back to work, but now you’re 55 years old. You retired when you were 35, and now you don’t have any of the knowledge that you had when you were 35.
And you have to go back to school, and that can be a real mess. But this is something that they’re talking about here.
You could have this happen where you just don’t realize you needed more money than you thought you were going to need. So that’s one mistake.
And his financial advisor says, Adam is the person’s name, had seen “high-earning professionals blow through their cash during retirement” only to come to the advisor when they’ve “gotten down to their last thousand dollars.”
And then they realize, “Oh, what do I do?”
And I’ve had that experience where people say, “Hey, Paul, this is what happened to me.” And I go, “I don’t know how to help you now.”
A friend of mine tells a story that’s really, really … he was talking about when he was working with this one guy.
It was a physician. And this guy goes, “I’m good. I don’t … I’ve got this. I’m a sophisticated investor, but I would love it if you’d help my daughter.”
And says she has, like, $250,000, and she just needs some help on making sure that she doesn’t make a mistake with her money.
This guy was like a brain surgeon or something. It was a neurosurgeon.
I know he had to work with his hands. I can’t remember exactly what he did, but he goes on his merry way.
And this is back in, I think it was in the early 2000s that this happened. In the late ’90s, the conversation took place, but in the early 2000s, this happened.
And you can kind of know where this is going.
Well, his daughter comes, works with the advisor, friend of mine that’s very academically based like we are. And she does fine.
And then what ends up happening was she comes years later and goes, “Hey, could you help my dad, do you remember him?”
“Oh yeah, I remember him. Yeah. Well, bring him in.”
And comes in, and apparently what happened, this guy, his whole net worth was just ground to a pulp because it didn’t get invested properly. Ended up in the tech bubble, and that whole thing just fell apart.
And a lot like today: we see these big tech companies are rocking it, and people are overweighted in large U.S. companies. And they’re thinking, “Hey, I’m bulletproof.”
Well, they didn’t come to their senses back in the late ’90s, many people, and ended up losing 80% of their money.
And that’s exactly what happened to this guy. Lost pretty much everything.
Comes back and says, “Hey.” And his hand’s shaking.
Well, here’s a guy who’s a neurosurgeon. Your hand shaking is not a real good idea.
So you can’t stay steady and do anything that you used to do. And yet he’s run out of money.
And it was just a really, really sad story. So this type of stuff happens.
Well, that’s one thing. Okay.
So you spend too much, or I could add to that you just kind of think you’re better at investing than you really are. You think you know more than you actually do.
That was one.
The Second Mistake: Not Having a Family Mission Statement
The next one was “Not having a family mission statement.”
And this was where people don’t really know what their money is for. And I liked that.
I thought that was a really good point in this article because that’s one of the things that we do with people first off. We’ll bring them through, “Hey, what’s your purpose for your money?”
And there are questions I like to ask. For example, I’ll have people come up with a bucket list.
And there are ways of asking that question, but actually attaching a value to those things. Because you may want a certain thing, but the reason you want it is actually more important than the thing you want.
And I’ll give you a simple example. Let’s say I want a cottage in New Hampshire or something like that.
And you go, well, if I get down into why do I want that cottage in New Hampshire. Maybe it’s to connect with family members, have a vacation place to go to.
Well, what’s your real purpose? Your real purpose is connection with family members.
It’s not necessarily the thing. It’s not the house or the cottage, in this particular case.
It’s what that represents and what it allows them, the connection that it allows.
So a lot of the things that we are really driven by have absolutely nothing to do with material goods. There’s something else behind it.
And a lot of times that’s a really important thing to actually establish because we may be blowing money on things that really don’t have any real purpose. And they’re not really meaningful to us.
What if we could just redirect our efforts to things that are really meaningful? And then we would have a more sustainable retirement, and we would lessen the opportunity for ourselves to run out of money and run our net worth into the ground.
Wouldn’t that be a kind of a cool thing? So I think that is really, really true.
We got to come up with a purpose and really think about, “What is our mission? What is it we really want to accomplish as a family?”
And a lot of times we don’t do those types of things, don’t go through those exercises, maybe because we don’t know how to. That’s one thing that’s quite possible.
Maybe not having a background. A lot of times it takes somebody to facilitate that, but it may be just — don’t even think about that kind of stuff.
The Third Mistake: Trusting Too Easily
And the third one was “Trusting too easily,” was what they wrote in the article.
It says people that “come into sudden wealth such as inheritance, lottery win, legal settlement, or sudden fame” or something like that. They’re not trained to manage money.
They didn’t ever grow up with it, or maybe they haven’t been around it, or it’s so sudden that quite often they end up vulnerable to bad investment opportunities.
And I’ve seen this many, many times with people.
I remember one guy coming in one day and he goes, “You’re my last hope.” And I was like, “Oh, boy, what?”
And he told me what had happened. He had a bunch of money, and it ended up becoming a whole lot of nothing.
Ended up being ground to a pulp because it was a really bad investment opportunity, but it sounded really great.
I’ve had this many times in my career. There are several instances that come to my mind that were really sad.
And it’s one of those things, you think everything makes so much sense when you hear the sales pitch. Oh yeah, this sounds really, really great.
And then when you really dig down, it isn’t so great. And then you can’t make up for the lost time, is really what it gets down to because it may be 20 years before things fall apart.
And then where are you?
And a lot of times people do blindly trust. And I’ve often said that: “Don’t blindly trust.” Don’t do it.
You need to understand. You need to be a partner in this process.
What am I doing?
Why am I doing it?
What are the expectations?
How does this work?
Why does it work?
I’m really big on why. Don’t tell me just to do something.
I want to know why I’m doing it. Because if I know why I’m doing it, I’m more likely to do it.
Very, very important. I’m more likely to carry through.
I’m more likely not to get sidetracked or pulled off if I know why I’m doing something and if it makes logical sense.
Because let’s face it, markets go up and they go down.
When they go up, everything’s hunky-dory. Everything’s great.
When they go down, that’s when I start to second guess myself. And that’s the worst time, quite often, to second guess yourself is when markets have gone down or what you’re investing in has gone down in value.
Because then you go and make a change. And then when you make that change, you lock in the loss, and you’re sunk.
So it’s really, really important to understand this.
So we talk about blindly trusting. It says, “Professional athletes are most vulnerable to this,” because they come into money.
I remember one guy, he was actually a football player going, “Well, I got two financial advisors.”
And they said, “Well, why do you have two?” Well, one’s watching the other.
And I’m like, “What if they’re both kind of just giving each other the pass, and they’re not really watching each other? One doesn’t want to call out the other?”
And you may be having mismanagement on both ends is what I’m thinking. And knowing the situation as I did, I knew that was the case.
So it can be something where you think you’ve dotted your I’s and crossed your T’s by having two different people watching things, and they’re both messing up in just different ways. And you’d go, “Wow!”
Why Do We Misplace Our Trust?
So why is it that we trust? Well, this is where the video comes in.
So Malcolm Gladwell is talking about “Talking to Strangers.” Writes this book, and he says, “I’m going to tell you a story from this.”
He says, “I’m really into CIA, and I’m really into the intrigue of the intelligence community and deep government, deep state type stuff.”
And he says, “There’s this guy …” And apparently he was reading something about this guy.
And he was referred to as the “Mountain Climber.” And the Mountain Climber was this top CIA operative.
And this guy could speak Russian better than a lot of Russians could speak Russian. And this guy was really, really good.
And the Russian government thought this guy is the epitome of unbelievably good operative.
And what happens is he gets promoted by the U.S. government to actually work in Havana, which — promoted to Havana? Well, Havana is, as he said, the back door to a lot of America’s enemies because it’s so close.
So they get in there, and they’re really close to the United States. So a lot of times people will go there.
So this guy is promoted to the top guy in Havana, and he gets this call. And he gets this call that he’s supposed to fly to Frankfurt, and he’s supposed to meet this guy named Florentino.
And Florentino is his equivalent in Havana at the time. He is the top guy in Havana, and he gets this call to go meet with this guy.
And this Florentino guy was disillusioned, and he was disillusioned with Castro. So he decides he’s out of Cuba.
He’s leaving Cuba. He’s defecting, and he has a story to tell.
Well, his thing is that he has a story to tell, and the U.S. government’s like, “Yeah, I want to hear this guy’s story.”
Well, he will only tell it to this guy who was referred to as the Mountain Climber.
He meets with this guy. And he says, “Well, tell me something.”
The Mountain Climber goes to this other guy from Cuba, “Tell me something to verify you’re who you are, the veracity of your story. Who are you? And prove to me that you’re legitimate.” Basically.
And he goes, “Well you had this guy by the name of Juan that you worked with.”
And he said, “Yeah.”
And he says, “Well, he took pictures of documents, of Castro’s documents.”
And he said, “He was a great source for me. Yeah.” And he says, “Well, how do you know him?”
And he goes, “Well, he worked for us. He was a double agent.”
And this guy’s like, “What? Are you kidding me?”
And he goes, “Oh, I’m not done yet.” And then he goes, “Oh, there was this guy named Pedro. And he would tell you all about the military capabilities of Cuba.”
“What?!” And he’s having a fit. “Oh my goodness. How do you know him?”
“Well, he was working for us. He was a double agent.”
And all these people that he’d worked with, his entire network, pretty much, in Cuba — the U.S. guy, the Mountain Climber, comes to find out that these are all operatives, and they’re all working for the other side.
Who Is Most Likely to Be Deceived?
And he goes, “Well, how do you get deceived like this? How is it? And who is it that gets deceived?”
And he goes, “We often think that the person that gets deceived is this little old lady in the middle of nowhere, that gets a call that somebody’s come into $3 million, and it has her name on it or something like that. And she falls for it and pulls out her checkbook or whatever.”
And the reality of it is, no, a lot of times it’s people you’d never dream of being naive that get fooled.
They’re not stupid. They tend to be very, very sophisticated.
And he used the example of Bernie Madoff, as I’ve used here on the radio show many times.
He didn’t go out and get little old people that had no money. He went after people that had a lot of money.
Hedge fund managers, that’s who he took advantage of. And he didn’t necessarily have the top accountant in the whole world.
The guy was from some little area in New York, a backwoods area in New York. And you never dream that a person like this had actually put together this whole thing.
And he actually didn’t get caught. He turned himself in.
So what often happens is we just trust people.
And he says, “The thing is, we often trust, and we think, ‘Oh, well, wouldn’t we have evolved out of this?’”
And he makes a really interesting point about how adaptive trust can actually be. It’s evolutionary.
And he says, “We tend to be bad at detecting deception.”
We’ve Adapted to Trust
He says, “Well let’s say, if you look at who you would choose, from an evolutionary standpoint over thousands of years, who would you actually choose as a spouse? Someone that’s loving, trusting, and open, or would you go and choose somebody that is dealing with paranoia and suspicion?”
No, you’d choose the person that is loving and trusting. That’s who you would actually …
So what happens is it has been something that has been very good from an adaptive standpoint, that we do tend to gravitate toward people who are loving and trusting. And therefore that has been what has been passed on.
And evil geniuses, I guess there are a few of them out there. There are some.
But a lot of times what happens is that, when you look at the investment industry, we don’t often find that there are people out there that are just waiting to take advantage of you. But a lot of times they themselves are deceived.
I’ve talked about being a broker for so many years. I was a broker for many, many years, and going to the broker dealer conferences, they were trying to get us to sell real estate investment trusts to people.
Permanent life insurance as an investment was another thing that they would come in … and they would say, “Hey, you guys really need to sell low income housing credits for people.”
And they all really, really sounded great. Annuities, indexed annuities, gold and commodities … investments based on demographic trends was one of the things that I’ve talked about here on this show.
And back when the big downturn in the economy happened in 2008, there were some of the most prominent financial people on TV, who shall remain nameless.
Although I’d be tempted to say names, I’m not going to.
They were telling people, “Please, if you need your money back in the next five years, please get it out of the stock market.”
Well, that was some of the worst advice ever, but did they probably believe that that was really a good idea? Yeah, I sincerely do believe that they did think it was a good idea.
And the reason why — why? Because a lot of times people get information, and you don’t know where they got the information.
That’s why I think it’s so important to understand investing.
What am I doing? Why am I doing it?
What are the expectations? How do markets work? Where do returns come?
You don’t have to know everything, but there are certain things that if you don’t understand, it is really easy to be taken advantage of by someone that may not be trying to take advantage of you.
They may actually think that what they’re telling you is really in your best interest, but maybe they are actually misled. Maybe they are blindly trusting.
Education Is the Key to Successful Investing
I’ve known a lot of people in the investment industry. They work for big investment firms, and they just parrot back whatever they were taught by their management, believing it actually made sense.
For example, I worked for a big insurance company.
And what they would talk about all the time is, “This is a great … look at this tax benefit of this life insurance policy. And look at how much money you can have in so many years.”
And they’d have these wonderful illustrations that didn’t work out. They didn’t work out, but at the time they were sold, they looked so good.
But the reality of it was people that were out there peddling this were blindly trusting the company and the leadership in the company that may or may not have necessarily had the best interest of them and their customers in mind. And that’s all it takes.
So blind trust. Why do we fall for things?
Not necessarily because we’re dumb, but so often it’s because we actually have this trust that has been adaptive for centuries and centuries.
And it’s actually something that’s really good, but you got to really be careful because blindly trusting can get you into so much trouble.
What am I doing? Why am I doing it?
And once I understand those things, I can be a much more successful investor.
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