Paul Graham On Why Rich People Lose It All (and lose time)
When we sold our startup in 1998 I suddenly got a lot of money. I now had to think about something I hadn’t had to think about before: how not to lose it. I knew it was possible to go from rich to poor, just as it was possible to go from poor to rich. But while I’d spent a lot of the past several years studying the paths from poor to rich, I knew practically nothing about the paths from rich to poor. Now, in order to avoid them, I had to learn where they were.
So I started to pay attention to how fortunes are lost. If you’d asked me as a kid how rich people became poor, I’d have said by spending all their money. That’s how it happens in books and movies, because that’s the colorful way to do it. But in fact the way most fortunes are lost is not through excessive expenditure, but through bad investments.
It’s hard to spend a fortune without noticing. Someone with ordinary tastes would find it hard to blow through more than a few tens of thousands of dollars without thinking “wow, I’m spending a lot of money.” Whereas if you start trading derivatives, you can lose a million dollars (as much as you want, really) in the blink of an eye.
In most people’s minds, spending money on luxuries sets off alarms that making investments doesn’t. Luxuries seem self-indulgent. And unless you got the money by inheriting it or winning a lottery, you’ve already been thoroughly trained that self-indulgence leads to trouble. Investing bypasses those alarms. You’re not spending the money; you’re just moving it from one asset to another. Which is why people trying to sell you expensive things say “it’s an investment.”
The solution is to develop new alarms. This can be a tricky business, because while the alarms that prevent you from overspending are so basic that they may even be in our DNA, the ones that prevent you from making bad investments have to be learned, and are sometimes fairly counterintuitive.
A few days ago I realized something surprising: the situation with time is much the same as with money. The most dangerous way to lose time is not to spend it having fun, but to spend it doing fake work. When you spend time having fun, you know you’re being self-indulgent. Alarms start to go off fairly quickly. If I woke up one morning and sat down on the sofa and watched TV all day, I’d feel like something was terribly wrong. Just thinking about it makes me wince. I’d start to feel uncomfortable after sitting on a sofa watching TV for 2 hours, let alone a whole day.
And yet I’ve definitely had days when I might as well have sat in front of a TV all day—days at the end of which, if I asked myself what I got done that day, the answer would have been: basically, nothing. I feel bad after these days too, but nothing like as bad as I’d feel if I spent the whole day on the sofa watching TV. If I spent a whole day watching TV I’d feel like I was descending into perdition. But the same alarms don’t go off on the days when I get nothing done, because I’m doing stuff that seems, superficially, like real work. Dealing with email, for example. You do it sitting at a desk. It’s not fun. So it must be work.
With time, as with money, avoiding pleasure is no longer enough to protect you. It probably was enough to protect hunter-gatherers, and perhaps all pre-industrial societies. So nature and nurture combine to make us avoid self-indulgence. But the world has gotten more complicated: the most dangerous traps now are new behaviors that bypass our alarms about self-indulgence by mimicking more virtuous types. And the worst thing is, they’re not even fun.
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I use to trade forex back in 2006 and 2007, right before the great recession started in the summer 2007. I lost everything, and worse, a lot of friends I cared about lost a lot of faith in me. It was very devastating to see them see me get so burned. Ever since then I went back to college and took finance to learn more about this fucking crazy world of money making money, to see if I could make sense of all the mumbo jumbo you read and see out there.
He is right, of course. I didn’t have any alarm bells go off when I borrowed 3000$ in credit card debt to finance my forex. I actually thought it was an “investment” and that in all investments there are risks, so it wasn’t much different from say buying stocks and bonds. My real hope was to get the 50x times interest on my money but as you know, anything that is leveraged is bound to make no money. Leverage is only good for insurance, in case your position tanks, your options or derivatives gain in value correspondingly (over time or the bigger the price differential, the closer the correlation is to “1″ or the delta approaches “1″. This means for $1 of the asset change, there should be a corresponding $1 change as well.
Of course I didn’t know about any of this shit then. I was just too busy trying to make money and being an idiot. So yeah, I pay for it to this day.
I lost maybe about $1000 in stocks over 2 or 3 years. The good news is I KNEW it was going to happen so I bought various kinds of positions. I also made a lot of money but I lost a lot of it too. In the end you gotta do the warren buffet way and take unleveraged positions in any asset class. Mathematically anything that is leverage will over time lose everything. Consider that you get a leveraged etf like say… QLD (Nasdaq 2x ETF leveraged).
Let us pre-suppose that the Nasdaq is at 2500 points today. It goes up 100 points for a gain that day of 2600/2500 – 1 or 4%. Qld, worth say $60 therefore, would gain 8% or $4.80 to end at $64.8
Ok so people are happy, they made some capital gains. Tomorrow, the markets open and I don’t know, the fed chairman is having sex with hookers and the wife just found out and is PISSED off like a banshee. Market confidence tanks at the “shock” that if powerful men will cheat on their lovely wives, then none of our women and men are safe. Morale suffers, stock prices tank. Close of market on Nasdaq is now 2500 or 3.84616% loss. Qld therefore tanks by 2x this amount for 7.69232%.
Qld at $64.80 x .9230768 = $59.815376. Funny the Nasdaq is worth the same today as it was previous the 100 point gain. Qld though has lost value.
So in essence, over time, you income approaches zero because the ups and downs of markets will eventually erode your securities value. This is why gamblers like me lose money. It is also why I sell call options because I know gamblers will lose over time. This is also why Warren Buffet generally just buys unleveraged stock positions to control or manage companies.
Granted, QLD does come back up is or not always delta=1 every day but that is because QLD itself is not leveraged, despite representing a basket of securities that are put together and that is leveraged. The point is don’t use margin and don’t borrow money. You have to invest $1 for every $1 worth’s of a security, which can be stock, currency, whatever. If you are leveraged, you will magnify the losses illustrated above. That is why it is proven scientifically that you cannot make money in forex over the long term. You have to trade it, and even then I don’t know if big hedge companies out there can do it.
So unless you’re a professionally trained day trader (that’s not me), you have to invest for the future, not trade for it.
Don’t lose your time and money. It will take away a part of your soul and morale. It fucking sucks.
Tags: Paul Graham On Why Rich People Lose It All (and lose time)
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