Victor Haghani, author of The Missing Billionaires, shares insights on why family fortunes get destroyed. He discusses his experience with the collapse and recovery of Long-Term Capital Management. Victor also talks about his journey from Tehran to London, his interest in mathematics, and navigating financial crises like the dot-com bubble.
Avoid excessive concentration in investments to protect against risk and preserve wealth.
Have a thoughtful and flexible spending policy that aligns with investment strategies, adjusting spending during market volatility.
Manage risk and volatility to protect compound returns and avoid erosion of wealth over time.
Deep dives
Understanding the Risk of Concentration
One of the key insights from the podcast is the risk of taking too much concentration in investments. The example of the Vanderbilt family is mentioned, where their wealth dissipated due to taking excessive concentration risks in railroads and transportation. This concentration increased the volatility of their portfolio, leading to significant wealth destruction over time. The lesson is to diversify investments and avoid excessive concentration in a single stock or sector to protect against risk and preserve wealth.
The Importance of a Thoughtful Spending Policy
The podcast emphasizes the need for a thoughtful and flexible spending policy that aligns with investment strategies and expected returns. The spending policy should consider the level of risk in the portfolio and adjust spending accordingly. If wealth declines due to market volatility, it is crucial to be willing to adjust spending to avoid financial instability. Being inflexible or maintaining an unsustainable spending level coupled with taking too much risk can lead to adverse consequences and wealth depletion.
Understanding the Impact of Risk on Compound Returns
Risk and volatility can significantly impact compound returns over time. The podcast provides examples of investment scenarios where the average annual returns may be positive, but the volatility erodes the compound returns. The concept of risk eating returns is explained, highlighting the importance of managing volatility and avoiding situations where risks undermine the growth of wealth. It underscores the need for a balanced investment approach that considers risk and seeks to minimize volatility drag to protect compound returns.
The Rise and Fall of Long-Term Capital Management
Long-Term Capital Management (LTCM) was a hedge fund that experienced tremendous success in the early years, generating annual returns of around 40%. Their secret sauce was combining quantitative models with a deep understanding of flows and financing markets. They had an edge with the support of Nobel Prize-winning economists on their team. However, the crisis struck in 1998 when a liquidity crisis and market turmoil led to significant losses for LTCM. The firm's risky positions and excessive leverage resulted in a need for a bailout from 14 banks. It was a painful and humbling experience for the firm, highlighting the unpredictability of markets and the dangers of taking on too much risk.
The Lessons Learned and Current Strategies
Following the LTCM crisis, Victor Haghani, one of the former partners, decided to establish Elm Wealth. Their mission is to help clients comfortably invest a substantial portion of their wealth in equities for the long term. They focus on managing risk by adjusting exposures based on market conditions. When markets are risky, they reduce exposure, and when markets recover, they increase exposure. By adhering to simple and transparent rules, they aim to provide clients with a more comfortable investment experience. Elm Wealth charges low fees and emphasizes educating clients, setting realistic expectations, and minimizing leverage to weather potential crises.
Victor Haghani is the author of a new book called The Missing Billionaires: A Guide to Making Better Financial Decisions, which explores why family fortunes like the Vanderbilts' get destroyed in the hands of the heirs. Victor knows a lot about wild swings in wealth. As co-founding partner of the Long-Term Capital Management (LTCM), Victor saw the hedge fund's value soar over the first years of its existence then plummet spectacularly, losing 90% of its value in the first nine months of 1998. It was bailed out by a consortium of banks that injected $3.6 billion under the supervision of the Federal Reserve. In this conversation and his new book, Victor graciously shares candid insights from this harrowing experience, discusses the emotional roller coaster of his fund’s very public implosion, and reminds us of some facts many have forgotten: that the banks got their money back as did most of the original investors. Unfortunately, a few investors got washed out, as did the founders. Victor tells Paul how he balanced regret with the need to move forward. Victor graduated from London School of Economics then started his career in 1984 at Salomon Brothers where he eventually became a managing director in the bond arbitrage group made famous by Michael Lewis in Liars Poker. His participation in the failure of LTCM was a life-changing experience that led him to question and revise much of the way he thought about the economy, markets, and investing. Through a careful study of the academic literature on investing and many thought-provoking discussions with friends, colleagues, and investors of all backgrounds,Victor concluded that savers can and should do much better. He founded Elm Wealth in 2011 to help investors, including his own family, manage their savings in a disciplined, research-based, cost-effective manner and to capture the long-term returns they ought to earn.
See more about The Missing Billionaires and Elm Wealth here and connect with Victor here.
⭐ Rate and Review Crazy Money here. (Seriously, do it!)⭐
✍️ Get Paul’s writing to your Inbox here. (Seriously, do this also!) ✍️
Remember Everything You Learn from Podcasts
Save insights instantly, chat with episodes, and build lasting knowledge - all powered by AI.
