“In the business world, the rear-view mirror is always clearer than the windshield.”
–Warren Buffett
Do you ever regret past money decisions?
For instance, if you are a millennial, do you ask yourself, “Why didn’t I purchase Beyond Meat stock when it first hit the market?” At this writing, it has sharply risen in value.
Or, if you are a Boomer, do you say to yourself, “Why didn’t I buy Microsoft or Berkshire stock when I was younger?”
Gazing in the rearview mirror makes it clear what you should have done. Hindsight is 20/20.
But sometimes that look backward is entirely misleading.
FINANCIAL MISSTEPS AND DISASTERS
To illustrate the point, we will look at decisions that “cost” their owners $30 and $90 billion respectively.
It does not get much worse than that.
But the results are somewhat surprising. The decisions made at the time were based on common sense. So, it is important to view the decision-making process critically and to learn what was involved. In turn, that can give MMH readers a guide as to how to act when confronted with vital financial and life decisions. After all, there can be long-term consequences to all of them.
SMART PEOPLE, COSTLY DECISIONS
The first example of missed opportunity, surprisingly, comes from the experience of Warren Buffett. You see, he decided to use many of his early gains to buy his first house for cash. However, if he had rented a home and invested in his company, he would be about $30 billion richer today. Now he is “only” worth $85 billion at this writing.
And Ronald Wayne, one of the first Apple employees, sold his 10% stake in Apple for $800 when the company was getting started in 1976. It would be worth about $90 billion at this writing if he held on to it.
WARREN BUFFETT—BUYING A HOUSE FOR CASH
In 1958, Warren Buffett bought his first house in Omaha, Nebraska for $31,500.
However, the pathway to purchase was not easy. Buffett and his family had to make many sacrifices to get that much money together. His family had to live in cheap apartments in New York and in Omaha for many years, and pinch pennies. That process was sometimes hard on his young family.
Put another way, by 1958, Buffett and his wife Susie both wanted to establish some roots, and settle into a comfortable life with their kids.
Of course, looking at it now, buying outright was a mistake. Buffett should have rented instead, something he later talked about.
However, please understand Buffett had some excellent reasons for doing what he did.
First, at that time, most people did anything they could to avoid debt after the Great Depression. The prevailing view was that Debt HAD to be avoided since it caused many bankruptcies and foreclosures. As only one example of the financial stress during that time, Buffett’s mother sometimes skipped meals in order to make ends meet. His father had to rebuild his business from scratch.
Second, the vast majority of wealthy people eventually purchase houses instead of renting. That decision is just a matter of playing the percentages. Homeowners are likely to have eleven times more net worth than those who rent over a lifetime.
Third, pursuing a reasonable home life is an underrated key to financial success. After all, divorce is a leading cause of bankruptcy, and arguments over money are the most common cause of marital strife. Family stability is paramount.
In other words, Buffett felt there had to be a wall between business and family decisions, and that wall was not to be breached.
So, when you look at it that way, you can understand why Buffett later called his home purchase his third-best investment after his two wedding rings.
RONALD WAYNE—SELLING TEN PERCENT OF APPLE FOR $800
Unfortunately, Ronald Wayne has become the poster child for missed opportunity. That reputation is undeserved.
However, when you are the 10% owner of one of the world’s most valuable companies, and you sell it for $800, people will question your judgment. In this case, the rearview mirror logic is brutal.
Of course, when you dive in, you realize that there is a lot more to the story. You see, Wayne came to Apple in 1976 during the startup phase. And at the time, the memory of his prior business bankruptcy was fresh in his mind.
Put another way, Wayne’s problem was that Apple carried risk. The Company had borrowed $15,000 and sold its inventory to a retailer who had proven unreliable. As a part-owner of the company, Wayne was potentially on the hook for the loan. And in 1976, that loan was almost as much as the average income in America. So, he took the radical step of selling his stake back to the founders. Then he quit.
TAKE A HARD LOOK AT WHAT WENT “WRONG.”
Notice that both situations dealt with the following three issues:
1. The decisions were both vital and stressful—two of the five most stressful decisions involve home purchase and job loss. So the stakes were exceptionally high.
2. Security was important—both men had been burned by debt or seen those who had. They were both risk-averse because neither felt they could manage a worst-case situation.
3. It was important to keep things simple—both men separated personal and business finances.
PAST MONEY MISTAKES: THE DISTORTION OF REARVIEW MIRROR “GAINS”
Let’s pause for a minute and talk about rearview mirror thinking.
By now you may have inferred that rearview mirror logic is flawed. After all, think about what is involved. To benefit at the time from a once in a lifetime opportunity, you would have had to:
1. Been alert for the optimal opportunity.
2. Understood what the opportunity was and how it worked
3. Realized that the investment/business venture was going to mushroom in value over time—far in excess of millions of other opportunities that were available.
4. Had money to invest (savings).
5. Acted on the opportunity.
6. Been patient and waited many years to have the situation play out.
All of these factors make selecting the “right” decision very difficult. After all, there is a chance for error at every single point in the process described above.
And yet, there is a lesson too. First, notice that the list above is actually a kind of action plan. It calls on a person to be observant, understand the (unique) opportunity, have money saved for investment, and be patient and work hard. In other words, people who use the skills and behaviors described in the MMH “What the Successful Do” section are far more likely to take advantage of an opportunity than those who do not. Many of those skills come into play when making critical decisions.
WHY MISSING THE ONCE IN A LIFETIME OPPORTUNITY CAN WORK OUT ANYWAY
While it is painful to miss out on a significant opportunity, many people do. After all, it has happened to some of the most successful people in the country.
So, what can you do if that happens? Well, it is important to keep perspective and continue to use the same skills described before.
Why? Because the behaviors noted there tend to make eventual success more likely even if an opportunity is missed. Moreover, those behaviors also have the benefit of allowing small financial advantages to compound.
Here is an example of the power of compounding from Buffett himself. Suppose that you were able to invest at the same time that Buffett started in 1942, and you, being a good saver and investor, put in $10,000 into the stock market. While you might not end up the third wealthiest person in the world, what would have happened if you had just placed those savings in an index fund? Buffett has pointed out that you would have in excess of $51,000,000 now. Not bad for just taking advantage of ordinary opportunities available to anyone.
The point is that outsized risk is not necessary to do well as long as you maintain financial discipline and a success-related mindset.
Missing a once in a lifetime opportunity can bruise your ego. However, it does not have to be fatal for your financial health.
Read on and see what happened to both men. You will see what I mean.
POSTSCRIPT—APPLE AND RONALD WAYNE
Periodically, Steve Jobs tried to hire Ronald Wayne back after Wayne sold his share in the company. Wayne never accepted. He never felt that he was a fit with the company culture.
And twenty-four years later, at the end of the year 2000, Apple’s stock price was near $1.00 per share. At that point, Wayne’s initial concerns about the company looked prescient. Bankruptcy was possible, even likely.
In other words, ONLY Ronald Wayne had the chance to keep 10% of a privately held startup that faced an uncertain future. EVERYONE could have bought a publicly-traded company that was in trouble. The opportunity came for all of us (who were old enough), and virtually everyone missed it.
At this writing, Apple is the most valuable company in the world by market capitalization.
POSTSCRIPT—BERKSHIRE HATHAWAY
After the purchase of the house, Buffett’s wife Susie reportedly spent an additional $15,000 to decorate it. No doubt that also impacted Buffett’s future net worth too. You do the math.
And Buffett did buy a second house many years later in California but did not buy it outright. The second time around, he used a mortgage. For someone increasing his investment returns at 20% per year, purchasing a second home for cash did not make sense. Moreover, at the time of the second purchase, more “risk” was justified—the new house was not a third of his net worth, it was a tiny fraction of it.
MISSED OPPORTUNITY: BUFFETT AND WAYNE
The difference between the two men is that Buffett knew he had to deal with immediate needs, AND he needed to capture long term economic benefits too. In his case, his was not an “ordinary”$50 million fortune; it turned out to be $80+ billion.
So, it turns out that neither man was defined by their critical missed opportunity at all. Buffett and Wayne’s financial legacies have been defined by what they did and did not do afterward.
And maybe that is the real lesson of the siren song of missed opportunity. The question should not be about what you lost gazing in the rearview mirror. It should be about what you intend to do going forward.
SUMMARY
1. Even smart people can make mistakes with money. No one has a crystal ball.
2. Missing a golden opportunity is not fatal to your wealth. Doing ordinary things covered in the “What Successful People Do” section can lead to good results over time.
3. While it can be worthwhile to study your past money mistakes to help yourself in the future, the actions you take now are more critical.
ACTION PLAN
1. Take advantage of opportunities. You must be observant, understand the (unique) opportunity, have money saved for investing in it, and be patient.
2. Develop good money and behavior habits. The small financial gains you get will compound over time whether you get a chance at a once in a lifetime opportunity or not.
3. Understand that it is no financial sin to deal with immediate needs. However, meeting those needs can impact your future net worth. Successful people are better than most at recognizing trade-offs between immediate and long term needs.
Disclaimer: consult with a financial professional before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Photo credit: Dcoetzee, public domain