There is an old hindi saying “The first generation will
invent, the second will expand, the third will preserve and the fourth will
lose.”
Everything in the
economy is cyclical. Nothing great or terrible is likely to stay that way for
long, because the same forces that cause things to be great or terrible also
plant the seeds to push them the other way. E.g. Bull markets make stocks
expensive, expensive stocks leave little room for error, and little room for
error increases the odds of bull markets ending. Same thing in the other
direction. Recessions cause pessimism. Pessimism causes underproduction,
underproduction leads to scarcity, scarcity leads to a new boom.
People whose
behaviours are changed by their own success, are vulnerable to the same cycles.
It goes like this. The more successful you are at something, the more convinced
you become that you’re doing it right. The more convinced you are that you’re
doing it right, the less open you are to change. The less open you are to
change, the more likely you are to tripping in a world that changes all the
time.
There are a million
ways to get rich. But the key to stay rich is humility. The irony is that
few things squash humility like getting rich in the first place. JPMorgan
Private Bank studied the ultra-wealthy Forbes 400 Richest Americans and found
that fewer than 15% of these multi-millionaires stayed on the list over a
21-year period. The majority saw their wealth stagnate or, worse, watched it
decline.
Few reasons why
people aren’t able to preserve wealth
- Excessive concentration in a particular asset is the foremost pitfall– It may sound clichéd “Putting all eggs in one basket” is a crime. Wealth concentration in a single asset class or a single company, exposes an investor to a host of risks that can permanently impair capital. Whether it’s due to the fading fortunes of a sector, management pratfalls or a changing competitive landscape, any single investment can easily lose value, sometimes quickly beyond ones control.
- Too much leverage - Unfortunately, in the blind pursuit of more money, many affluent individuals forget their paramount goal is to stay wealthy.
- Chronic overspending is the third main pitfall. Most wealthy families do not budget because they have rarely seen problematic times related to their finances. As Warren Buffett once said “I have lot of friends who have a lot more possessions. But in some cases I feel the possessions possesses them, rather than the other way round”
- Finally, family dynamics can impair wealth.
