“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”– Ernest Hemingway, The Sun Also Rises
Hello there,
Let me tell you a story first. It’s about how the billionaires lost their money – crores of rupees in generational wealth. It also tells you that having the best stock, the best advisor, or the best mutual fund is not always enough. It is something even more fundamental.
In 2023, I was working as a wealth manager for some of the wealthiest families in India. I was – and still am – an avid reader, always looking for reading material and books that challenge my thinking, and make me better at life in general. Back then, I came across this book titled “The Missing Billionaires” authored by Victor Haghani. The author had been a fund manager for one of the largest hedge funds in America (USA). (A hedge fund is basically a private mutual fund – not open to everyone but to the selected, few rich investors).
Before you think that the book was about billionaires getting kidnapped or suddenly vanishing from the face of the earth, let me tell you it’s not about that. It was an even better, more fascinating story based on true events – how the heirs of some of the richest American families went bankrupt slowly and steadily. Yes, bankrupt.
Here’s the book’s background: In 1900, there were more than a thousand families in the USA, who had a wealth of more than 5 million dollars. It was like having around 1 billion dollars today, or Rs 1600 crore. The richest of them had hundreds of millions of dollars.
It was a lot of money by any standards. And if all the next generations of these families had just invested all their inheritance in something as simple as a fixed deposit, we would have a few thousand billionaires in the USA today. But how many are there in 2025?
As per Forbes, only around 900!
And only one or two of those 900 are the heirs of those wealthiest families from 1900s. It would be fair to assume that all of them had the best advisors and tools at their disposal, helping them make sound financial decisions. Yet most of them failed to even preserve the money they inherited, even more failing to grow it over time. What the hell happened there? How can people with access to the best tools, the best people, and a growing economy fail to grow their money?
The Two Behaviors
1. “I’m 100% sure this will work. let me put a lot of money in it.”
There are two fascinating mistakes those guys committed – repeatedly over many years – that explain why things turned out this way. Most people don’t even pay attention to those. They think “These mistakes are for people with no knowledge of markets or no advisors, not for me.” Turns out, knowledge or advisors have nothing to do with whether you will fall prey to the behaviors demonstrated by the “lost billionaires”.
The first mistake? Not investing in different products and assets. The financial term for this is “concentration.”
Over the course of these 125 years, those guys made sizable investments in a handful of products – one stock, one startup, one company or so on. For unknown reasons, they ignored the age-old wisdom – “do not keep all your eggs in one basket” (The financial term for that principle is diversification, the opposite of concentration).
It could be their overconfidence, their familiarity with the product/company/stock, or any of the 100 other reasons that make people overconfident. Maybe they overestimated their chances of success, given that the best tools and advisors were by their side. Having these resources can make anyone overconfident about being better than “ordinary” investors at predicting the future. It can lead you to think something like…..👇
And boy did they gamble recklessly!
But if this were their only mistake, they might have recovered over time, learning from their failures. There was something else that made their comeback more and more difficult with every passing year.
2. “I’m a billionaire, I don’t need to watch my spending.”
The second reason is – bad spending habits. You might think that the principle of “restrict your spending” applies to people with little to no wealth, right? Turns out that “spending within your means” is universally applicable.
The inheritors of the rich in our story had decided to spend a fixed amount of money every year, say $10 million, which they would take out from their investments. And the spends would generally grow every year, with inflation and all. The ideas of “expense tracking”, “pause before you spend” were not in their vocabulary. And I mean with that amount of wealth, who can even blame them?
So here’s what was happening year after year, as their lives were progressing:
- On one hand, they were losing money with bad investment decisions losing their principle (mistake #1), and
- On the other hand, they were spending it like the money would automatically find a way to keep up with their expenses
It’s like taking out higher and higher amounts of water from a leaky bucket. Yes, the tap refills it (the returns on their investments). But if anyone takes out more water than the tap can refill, the bucket WILL get empty eventually. And that’s what exactly happened.
Slowly and steadily, all of those potential – and some actual – billionaires went “missing”.
What are the lessons here?
When I read this story in the book, the thing that most surprised me was not that people lost money, but that billions were lost over such simple mistakes. This tells me that the easiest to understand rules are also the easiest to ignore.
The story also emphasizes that the best research tools, the smartest advisors, and no amount of money can help us if we ignore the basics.
The two rules relevant to this story are:
- Diversification: Which means spreading our investments across assets like equity, debt, gold, real estate etc., and not being overconfident in just one asset or product at any time, ever, no matter how good it is.
- Control your spending: If someone’s income depends mainly on their investments, they have to be extremely careful of their spending. They need to treat every large spend like a financial decision. There is no room for large impulse spends. And even if that is not the case, I believe that mindful spending would only help. Not being too stingy, not being too extravagant – just mindful. On many occasions, it means defying pressure from the society and our peers.
I hope you find the article useful and informative. Many things about money are simple but easy to forget and difficult to practice.
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See you next time!👋