The Art Of Getting Rich Vs Staying Rich

Getting rich and staying rich require entirely different skill sets, and one doesn’t necessarily translate to the other. Throughout history, even the smartest individuals have lost fortunes. The cycles of the stock market and the rise and fall of empires demonstrate why getting rich and staying rich are distinct challenges.

Take the Roman Empire, for example. It reached its peak in the 1st and 2nd centuries AD with economic prosperity and military strength. However, its decline was a complex process involving political, economic, military, and social factors.

A significant issue was the debasement of their currency, which contributed to their downfall and highlights how financial mismanagement can weaken even the strongest systems.

This concept of financial mismanagement is crucial for staying rich. Stock market booms often stem from excessive optimism, but these booms inevitably lead to crashes. History shows us this pattern with events like the tulip mania (1634-1637), the South Sea Bubble (1720), the Great Depression (1929), and the Financial Crisis (2008).

Many people have become rich, and just as many have lost their fortunes. The skills needed to get rich differ vastly from those needed to stay rich. Understanding this distinction is key to achieving and maintaining wealth.

Stories About Getting Rich

Let’s delve into two parallel stories about individuals who were successful in getting rich but struggled with staying rich.

The World’s Greatest Trader

When I began investing, one of the first books I read was Reminiscences of a Stock Operator, which tells the story of Jesse Livermore. Born in 1877, Livermore became the world’s greatest trader before anyone even knew what a trader was.

He had an uncanny ability to read the tape and predict stock price movements. By the age of 30, he was worth an inflation-adjusted $100 million.

Then came 1929, a year that saw the stock market lose a third of its value and usher in the Great Depression. On October 24, 1929, Livermore came home to his wife, who, having seen news of the day’s record market crash, was ready to console him and return to a life of frugality.

However, Livermore had shorted the market and made more money in one day than he had in his entire life. He told his wife, “No darling, I have just had my best ever trading day – we are fabulously rich and can do whatever we like.” That day, he made the inflation-adjusted equivalent of $3 billion.

The Successful Property Developer

While Livermore and his family celebrated their unimaginable success, another man, Abraham Germansky, faced a different fate. Germansky was a successful multimillionaire real estate developer in the 1920s who also loved stocks and bet heavily as the market boomed.

However, unlike Livermore, Germansky with his leveraged positions was entirely wiped out when the 1929 crash unfolded.

On October 24, Germansky disappeared. The New York Times published a brief story in its October 26 edition, with Germansky’s lawyer, Bernard Sandler, seeking information on his whereabouts. The story was poignant in its simplicity:

“Sandler said he was told by Mrs. Germansky that a friend saw her husband late Thursday on Wall Street near the Stock Exchange. According to her informant, her husband was tearing a strip of ticker tape into bits and scattering it on the sidewalk as he walked Broadway.”

And that was the tragic end of Germansky.

The Art Of Getting Rich

Jesse Livermore’s story didn’t have a fairytale ending. Like Germansky, Livermore had the knack for getting rich, but staying rich was another matter.

Germansky made his fortune in property development but lost it all by taking excessive risks with leverage. Livermore, also leveraging heavily, made a fortune with his opposite position during the market crash. However, he could have easily faced Germansky’s fate.

Fast forward four years, and their lives converged. Brimming with confidence, Livermore took on increasing debt to make more money, eventually losing everything. By 1933, he had lost much of his wealth due to bad trades, personal spending, and the market’s recovery, which worked against his bearish positions.

Livermore’s aggressive speculation and high leverage led to large swings in his net worth. Despite his earlier successes, his later years were marked by significant financial and personal difficulties.

These stories illustrate that getting rich requires taking some risks. The safest way to save money might be under your mattress or in a savings account, but bank interest rarely keeps up with inflation, and no one gets wealthy from savings alone.

To accumulate significant wealth, we need to invest in higher-return assets like bonds, property, shares, or cryptocurrency. More speculative assets come with higher risks but also the potential for higher returns.

All forms of investing involve risks, and taking higher risks doesn’t always lead to higher rewards. As with Livermore and Germansky, it can end in disaster if not managed carefully. The challenge of getting rich and staying rich lies in balancing risk and reward.

The Art Of Staying Rich

Every year, Forbes publishes its list of the richest people, but 20% of them get replaced every decade. Staying rich is not easy.

Making money is one thing; keeping it is another. This challenge affects everyone, from the lowest to the highest earners. Lifestyle creep, where expenses increase with income, is real. Bigger houses, nicer cars, and more vacations often inflate our social status, driven by our strange tendency to seek approval from people we don’t even know.

Staying rich, unlike getting rich, requires humility and frugality. It’s crucial to remember that the same factors that helped you make money can also lead to losing it. Livermore and Germansky exemplify this. Both were successful and wealthy, but their desire for more led them to risk everything they had.

John Bogle’s book, “Enough,” starts with a thought-provoking story:

“At a party given by a billionaire on Shelter Island, the late Kurt Vonnegut informs his pal, author Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel ‘Catch-22’ over its entire history. Heller responds, ‘Yes, but I have something he will never have . . . Enough.'”

This story made me reflect on how much I need to feel content. I don’t need a hundred million dollars or a billion dollars, but I know I need more than a million. Finding my “enough” lies somewhere in between.

I never want to risk losing everything and starting from zero again. Balancing the pursuit of getting rich with the wisdom of staying rich is essential.

Key Takeaways

• History shows even the smartest can lose fortunes due to financial mismanagement and market cycles, highlighting the importance of prudent wealth management.
• Livermore and Germansky’s stories show that while taking risks can lead to wealth, maintaining it requires prudent risk management and avoiding excessive leverage.
• Staying rich is harder than getting rich; it requires humility, frugality, and managing lifestyle creep. Balancing risk and reward while knowing your “enough” is key to maintaining wealth.

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