TL;DR - Even the smartest person can make an incredibly stupid financial decision. Mastering our behavior is the key to financial success. “A genius is the man who can do the average thing when everyone else around him is losing his mind” - Napoleon Bonaparte.

Before I dive into the main topic of this week, I’m going to tell you all a true story about someone (for now I’ll call him “Person X”) who momentarily lost his mind and in the process lost more than half of his fortune.

Person X was exceptional at his job, had amassed a fortune that his family could comfortably live off of, and was widely regarded as the brightest mind of his generation. He didn’t have as much money as Jeff Bezos, but he had more money than he knew what to do with.

Consistent with his reputation for brilliance and rationality, he was known for making safe and reliable investments in instruments that provided a regular stream of income. In other words, he was not a speculator. He was not trying to day-trade the market in an effort to cut corners on the road to wealth creation.

I’m trying to paint a picture here, and if I haven’t already, let me be clear: this guy was as solid as it comes!

Greed is a hell of a drug

So what happened? In the middle of 1720, London’s stock market was having a great year. The South Sea Company, one of the largest private companies in history, had gone up almost 800% since the beginning of that year. Everyone was making money on them. And when I say making money, I don’t mean real money; I mean paper gains.

Paper gains are the worst type of gains, but the most intoxicating for those who have experienced them. You aren’t actually making money because you haven’t sold anything yet, but in your head you are already spending the money you don’t have. You keep looking at the numbers go up, and each time you look there’s a hit of dopamine that rushes to your brain.

This is what economists and historians call “mania”, and London in 1720 was definitely gripped by a type of “South Sea Mania”.

As impartial observers, we could have advised Person X that no matter how good a company’s prospects might be, an 800% increase in share price over eight months is probably not sustainable. We don’t need to be geniuses to figure that out.

However, Person X succumbed to the mania surrounding him. He saw people who were dumber than him making fortunes and his own fortune started to look small by comparison. After sitting out the early days of the mania, he finally decided to jump in at the heights of the market and try his luck.

It would have been one thing if Person X decided to risk only a portion of his wealth on the South Sea Company. At least he would have ring-fenced the risk around this bet. If it went well, then his net worth would grow at a decent clip. If it went south, then he would still be wealthy.

Heads he wins, tails he doesn’t lose a lot.

Unfortunately, Person X decided to sell almost all of his conservative investments and trade them in for shares in the South Sea Company. In a couple of months, shares of the South Sea Company plummeted, and by the end of the year, the stock was trading for less than what it was trading at when the mania began in January.

I know what you must be thinking. Person X was an idiot.

How could someone be so stupid?

Why risk your entire net worth on something so speculative?

Must be some village idiot.

No. Person X was Isaac Newton, perhaps the greatest mathematician of all time. Newton is reported to have said “I can calculate the motions of the heavenly bodies, but not the madness of people.”

If someone like Isaac Newton could make such an error when it came to his personal finances, what hope do the rest of us have? I know you might think I’m crazy, but I actually find this story very encouraging for the rest of us in large part due to the lessons I learned from my favorite book.

The best financial book you’ll ever read

The best financial book that I have ever read is The Psychology of Money by Morgan Housel. I recommend that all of you read it, if you haven’t already. For those of you who are not big on reading full books, the central theme is the importance of your behavior when it comes to your financial success.

Put simply, the single most significant and determinative factor in your financial success is your behavior.

That might seem a bit scary at first, but I think it is empowering. It is one of the main reasons why I love studying personal finance. Controlling your behavior is simple but not easy, and because it is simple, it means that any of us can master our behaviors and emotions no matter how smart we are.

Bringing it back to our good friend Isaac, a lifetime dedicated to the most intellectual pursuits could not save him from his behavior. It wasn’t his intellect that caused his ruin, it was his behavior. He failed to control one of the most basic human emotions: greed.

The reason I find his story encouraging is because it shows that being a master of your own personal finances is not something that is given from God. It requires a base level of intelligence, and then the rest is all about how you manage your own emotions. The financial industry is always trying to sell us easy solutions because that is what we are craving.

We want something easy.

“Invest in this scheme where your downside is capped at 10%, and you can enjoy up to 100% of the upside for a period of six years.”

Seems easy enough. I’ll take a potential double on my money if all I have to risk is a 10% drawdown. Sign me up!

And then in REAAAAAAALLLLY fine print a lawyer (probably myself) has written “The returns presented to you here are projections only and are not intended to guarantee anything. You might lose all of your money. Past returns are not indicative of future results.”

Well, shit. Wall Street has to sell the “easy but complex” because nobody wants to pay for the simple and difficult. Wall Street doesn’t look smart when they are selling simple solutions.

The simple truth is that over the long term, if you stay invested in the market, limit your debt that you carry, keep a cash position that will cover six months of expenses and spend less than you make, you will likely achieve all the wealth you and your family will ever need. Doing these simple things is not easy, and a lot of it has to do with managing our behavior and emotions.

How do you stay invested in the market? You make sure that you never have so much at risk that you feel compelled to sell out when the market inevitably takes a turn for the worst. You need to control your fear.

How do you prevent yourself from pulling an Isaac Newton and putting all of your money into a speculative venture? You need to control your greed.

In the book, Morgan Housel recounts one of his favorites stories about Ronald James Read, who was an American philanthropist, investor, janitor, and gas station attendant. He fixed cars at a gas station for 25 years, swept floors at JC Penney for 17 years, bought an affordable house at 38 and lived there till he died. When he died, he had more than $8 million to his name.

The secret was simple. He saved whatever he could with his meagre salary, invested it in blue chip stocks (i.e., the biggest and best companies that the stock market offers retail investors) and he waited for decades. In the end, he had $8 million.

Housel contrasts Read’s story with one about Richard Fuscone, who was a Harvard-educated, Merrill Lynch Executive with an MBA. After a decorated career in financial services, he retired in his 40s to become a philanthropist. In the mid 2000s, he borrowed heavily to expand an 18,000 square foot home in Greenwich, Connecticut that had 11 bathrooms, two elevators, two pools, seven garages, and cost more than $90,000 a month to maintain. Then the 2008 financial crisis hit and turned Fuscone’s finances into a big fat goose egg.

As Housel himself puts it, “Ronal Read was patient; Richard Fuscone was greedy. That’s all it took to eclipse the massive education and experience gap between the two.”

Conclusion

Where does this leave us? How do we control our behavior? How do we do the average thing while everyone around us is losing their minds? I don't think there is a single way to do this, but I think I've found a way to do this that works for me. Creating a plan for how to consistently and intentionally save, invest and spend the money we have today for the life we want has helped me stay on track over the last seven years.

I've been trying to figure out how to package this information (or whether to package it at all). Instead of banging my head against the wall trying to determine how and what to create, it might be easier to ask the TIB community to tell me directly. Again, I really appreciate the honest feedback (even if the feedback is "Hell no, I don't want this" because it will save me time putting together a product nobody wants!). Until next week.

^{Disclaimer: Nothing contained in this website and newsletter should be understood as investment or financial advice. All investment strategies and investments involve the risk of loss. Past performance does not guarantee future results. Everything written and expressed in this newsletter is only the writer's opinion and should not be considered investment advice. Before investing in anything, know your risk profile and if needed, consult a professional. Nothing on this site should ever be considered advice, research, or an invitation to buy or sell any securities. Rohan Muralidhar is not a licensed securities dealer, broker or US Investment adviser or investment bank. This newsletter is not an offer to buy or sell, nor is it a solicitation of an offer to buy or sell or to participate in any advisory services or trading strategy.}