My friend David Russell says that witnessing all the mistakes that entrepreneurs make when they become investors has convinced him that “people who become rich think they’re not just smart, but wise, all knowing and all seeing.”1
My take is that they are really and even uniquely knowledgeable, but only about the specific product, service, or industry they mastered to build their wealth. Often that deep knowledge is not particularly translatable to other sectors of the economy, much less the world of investing, which is very different from running a business with all its powers, information, and latitude.
I learned that lesson the hard way by losing a fair amount of money. The upside was that it inspired me to found an organization to help successful wealth creators grapple with the challenges of wealth preservation. The Portfolio Defense typically pours a bucket of cold water on any illusions newly minted investors might have of equaling the success they enjoyed as entrepreneurs. To put things in context, most members have typically generated compounded annual returns in the 15 to 30 percent range over sustained periods, maybe even decades (Warren Buffett delivered 18 percent returns over 47 years) to generate the kind of wealth that qualifies them for membership in our organization. Yet as prudent investors, it is hard to sustain 5 percent returns in the current low-interest-rate environment.
The message we hear ...