“You can’t make a good deal with a bad person.”
–Warren Buffett
Hello everyone.
Have you ever won a battle that caused you to lose out on a bigger goal?
That kind of paradox can happen as you pursue financial independence. We will talk about that, what to look for, and what situations to avoid.
THE BATTLE
Let me give you a recent example from my own experience first.
I had a bout with a recent tenant of mine.
We argued over a relatively minor expense when he moved out of my rental. It seemed to me he should pay for work he had not completed as required by the rental contract. He, in turn, felt that I was unclear about what I wanted.
As a result, he got upset when I told him I would charge him for uncompleted work. And his anger was not an ordinary type of upset. At one point, he sent me an angry text after midnight. And the text was not wholly rational and referenced both history and issues that had been resolved.
To be blunt, he seemed a little unbalanced.
The angry, escalating rhetoric alarmed me. And I had to admit that I had made one mistake—I should have returned a call to help clarify things earlier. But his duty was obvious to me–I wanted him to return the property to the same condition at occupancy, less ordinary wear and tear. That requirement was in the contract, and I thought it was self-evident.
Nonetheless, after a few go-arounds, I finally paid a small cleaning bill and let him off the hook. The amount of time I might waste and the possibility that the situation would escalate made getting into an extended argument with him fairly stupid. After all, I was about to earn almost 30 percent more income from the same rental with a new tenant. Time to move on.
So, I applied the lesson of opportunity cost to this situation. See here.
MISTAKE 1: SOCIAL AND ETHICAL BLUNDERS
I understand that there is a huge difference between acting to get your rent deposit back and achieving financial independence. But the social lessons are the same: if people don’t like you and your behavior, they will not do repeat business with you if they have a choice. In this case, they won’t give you a good reference with a future landlord.
Likewise, whether you are dealing with customers, co-workers, your boss, etc., you want to have repeat business and smooth interaction. That harmonious interaction can help you to achieve your financial independence by helping build wealth.
Here are some behaviors you should try to avoid.
- Escalating a minor conflict out of proportion, especially in writing
- Blaming others for your mistakes or failing to comply with a contract.
- Keeping grudges and bringing up history. If you must argue about something, stick to the subject and keep it civil.
Sometimes, you can “win” with these behaviors and tactics but usually lose in other ways that may not be apparent.
Here are a few other situations to avoid as you pursue financial independence.
MISTAKE 2: MAKE A “GOOD DEAL” WITH A BAD PERSON
It is tempting to declare victory when you get promises that make you feel like you have “won.”
But if you get a promise from someone who won’t fulfill it, there is no victory. Likewise, signing an “ironclad” contract with a bad person sounds like it cements victory but does not. Business history is riddled with unfulfilled contract promises. If you deal with a bad person, expect to spend a lot of time in court and pay a lot of lawyers.
For example, consider the recent case of FTX, the cryptocurrency exchange. Many investors did very well investing in crypto—especially in the early years. The problem was that FTX was largely unregulated and had few internal accounting controls. When that was fully disclosed, and Sam Bankman-Fried was charged with fraud over some of his business practices, many investors lost heavily.
The case is still being litigated, so we don’t know the outcome, but there were a lot of red flags. And it will be difficult for many investors to get their money back.
Or, consider the fate of President US Grant, who trusted his son-in-law to start a new business venture that was actually a Ponzi scheme. Grant went bankrupt after investing all his money.
His widow was saved from abject poverty by publishing his memoirs shortly after his death.
MISTAKE 3: RELY ON BAD HABITS AND STRATEGIES TO WIN
Early success, based on a flawed strategy, is a kind of curse.
For instance, when I first learned to play chess, I learned from and played against a more experienced player. In our first game, his first few moves followed a pattern called the scholar’s mate. He beat me after a few moves. But after getting more familiar with chess after a few games, I avoided the early trap and began to beat him regularly. It turned out that the opening sequence did not work well against more experienced players. But he did not stop. And the strategy that had gotten him early success kept failing.
Here is a financial example of the same idea. Many Americans cash out their retirement savings each time they change jobs. That allows them to pay bills and make major purchases. So, I suppose you can say that they “win.” Of course, that means they are later unprepared for retirement, pay penalties, and incur big tax bills.
Many people, thinking that the short-term relief is a success, repeat this mistake several times over their careers.
MISTAKE 4: FOCUS ON SHORT-TERM WINNING THAT CAUSES LONG-TERM LOSING
Everyone wants to “win” by showing off their new car and wardrobe and demonstrating that they have made it.
However, using high-interest credit cards to purchase those items is a costly way to impress everyone. Not only are rates about double that of personal loans, but the cost of making minimum payments is astronomical. See here, for an example, how interest costs can saddle you with 15 years of debt and more than double the purchase cost.
You want to be a lender, not a borrower, for that kind of return. See here for Warren Buffett’s comments.
Unfortunately, credit card debt in our nation is currently at record levels.
CONCLUSION
If your guts tell you that your present course wastes time, offends many others, focuses solely on short-term gain, or makes you spend time with people you don’t trust, pay attention. There is likely something wrong, and you should change course.
Disclaimer: consult with a financial fiduciary before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Image: Birmingham Museums Trust
License: Unsplash