Why Billionaires Are Gamblers

Why do billionaires, even after they’re fabulously wealthy, still work so hard?

I put this question to a friend who manages money for what’s called “high-net-worth individuals.” His answer: Because they’re wired that way. They’re restless. A billionaire only becomes a billionaire by working hard, and that’s a tough mindset to let go.

Similarly, a billionaire usually becomes a billionaire by taking risks that most of us would shy away from. Here are three famous examples:

1. Elon Musk
“I was actually always fairly pessimistic about the outcome of Tesla, all the way from the beginning," said Elon Musk. In those very early days, “I thought, we have a maybe 10% chance of success. And we came very close to failing many times, so I never really thought before it actually happened that it would be that successful.”

2. Sheldon Adelson
After taking his company public in 2004, Sheldon Adelson’s net worth grew for 2 years by $1 million an hour. In a few months in 2009, it fell from $30 billion to $2 billion. But by 2013, he had it all back, with billions to spare.

3. Sumner Redstone

Wall Street analysts insisted that Sumner Redstone would never recoup the $10 billion he had spent in 1994 to acquire the Paramount movie studio. By 1998, Forbes declared, “Paramount now looks like a bargain.”

The Big Short: How Goldman Sachs Weaponized the Financial Crisis of 2007

William Cohan explains:

“At the same time that Goldman was shorting the mortgage market, it also had billions in mortgage-related securities larding up its balance sheet that it couldn’t offload to investors. (Not unlike every other big Wall Street bank.) In other words, at the same time that Goldman was shorting the mortgage market, it was also long the mortgage market. While that might sound like a smart hedge, it was not so smart, the Goldman executives decided, in 2007 when the short side of the mortgage trade was beginning to pay off big time.

“That’s when Goldman, led by Cohn among others, decided that the firm needed to sell the inventory of mortgage securities that it had on its balance sheet. Cohn insisted the inventory had to be sold in order to get it far away from Goldman regardless of the price the securities would fetch in the market. That was just smart risk management. It was also pretty obvious that in the thinly traded market for these complex mortgage securities, if Goldman started to sell its inventory into the market at, say, 50 cents on the dollar when everyone else had them on their books at close to 100 cents on the dollar, word would get around quickly that the mighty Goldman had a very different view of their value than the rest of Wall Street. The price of the securities would have to fall. If Goldman just happened to have a ‘big short’ trade on its books against the mortgage market at the same time it was driving down the price of the securities in the market by selling them for whatever price they could get, well then all the better for Goldman Sachs.

“Cohn told me a story of what he and other trader types at Goldman were experiencing daily as the market deteriorated throughout 2007 and confusion gripped other firms about how to price these securities. At one point, he said, Goldman offered to sell mortgage securities to KKR Financial Holdings, a specialty finance company affiliated with KKR, the buyout firm. Cohn called up Nino Fanlo, one of the founders of KKR Financial Holdings, and offered him Goldman’s entire $10 billion portfolio of mortgage securities at around 55 cents on the dollar, well below what the securities seemed to be trading for in the market. Fanlo called Cohn back and told him, ‘You’re way off market. Everyone else is at 80 or 85.’ If that was the case, Cohn told Fanlo, then KKR could have the windfall of buying the securities at 55 cents and selling them at 80 cents. 25 percentage points of profit on $10 billion face amount of securities was a cool $2.5 billion. Cohn said he was anxious to get the securities out of Goldman’s inventory; he had been trying to sell the securities at 55 cents on the dollar for a period of time and people would just hang up on him. A few days later, Fanlo called Cohn back. ‘He came back and said, ‘I think your mark might be right,’ Cohn said. ‘And that mark went down to 30.’

How Does a “Mutual” Fund Differ From an “Index” Fund?

	Mutual	Index
Assets	Little Change (Passive Management)	More Change (Active Management)
Fees	Low	Higher
Performance	Match the Market	Beat the Market
Stability	Predictable	Less Predictable

How Does a “Bear” Market Differ From a “Bull” Market?

“Bear market” and “bull market” are both terms to describe the stock market and investing. They’re easy to tell apart when you consider the animals’ characteristics.

In a bull market, everything’s moving forward: investors are confident making a lot of buys, more companies are entering the stock market, and more money is being invested in the stock market overall.

In a bear market, investors pull back (like bears hibernating). Prices start to hover and go down, and people wait and see more before investing additional money in stocks and bonds.

The Most Important Financial Terms Everyone Should Know

How Does “Annual Percentage Rate” Differ From “Annual Percentage Yield”?

APR
APR stands for Annual Percentage Rate. It’s the interest rate you’d pay on a loan (such as credit card debt you don’t pay off when the bill’s due) or earn on an investment in one year including fees.

APY
APY stands for Annual Percentage Yield. It’s just like APR, except it takes into account the compound interest you’d earn or pay over that year. APY includes interest you’ve already accumulated in its calculations, so it is higher than the APR. This is why banks advertise the APY for savings accounts but the APR for loans and credit cards.

Why You Need to Know This
APR is helpful for comparing loans, such as one credit card offer versus another’s or one mortgage loan from another. The APY is more realistic, however, and you can calculate it yourself.

The Most Important Financial Terms Everyone Should Know

Are You Financially Literate? Answer These 3 Questions to Find Out

1. Interest

Suppose you have $100 in a savings account and the interest rate was 2% per year. After 5 years, how much you would have in the account if you left the money to grow?

Possible Answers
A) More than $102.
B) Exactly $102.
C) Less than $102.

Correct Answer
The correct answer is: A), more than $102. Because 2% interest on $100 in a year is $2, so after year 1 you have $102 — and then over the remaining 4 years, the interest grows on that $102, and so on. And that’s why compound interest has been called “the 8th wonder of the world.”

2. Inflation

Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account?

Possible Answers
A) More than today.
B) Exactly the same as today.
C) Less than today.

Correct Answer
The correct answer is C), less than today, because if inflation is 2% , prices go up 2%. But if you only earned 1% in your saving account, you basically can buy less.

3. Diversification

Is the following statement is true or false: buying a single company stock usually provides a safer return than a stock mutual fund.

Possible Answers
A) True
B) False

Correct Answer
The correct answer is true. A single company is a lot riskier than a basket of stocks. Don’t put all your eggs in one basket.

Everything You Always Wanted to Know About Money (but Were Afraid to Ask)

Why Warren Buffet Gives Away His Best Financial Advice for Free

“Buffett could easily have decided that the numbers speak for themselves — especially when they’re enunciating as loudly and clearly as his do. Buffett took over Berkshire Hathaway in April 1965, when the shares cost $18. By the time of his 50th-anniversary letter to shareholders, in 2015, the shares were trading for $223,000, an annual gain of about 21%. No other investor matches that record over that period of time. In the world of hedge funds, secrecy about investment methods is de rigueur: if the sauce weren’t secret, you wouldn’t be having to pay 2% per year, and 20% of the profit on top, for your serving of it. Buffett, by contrast, doesn’t miss an opportunity to explain his ideas.”

How Should We Read Investor Letters

How to Ride the Stock Market

How Warren Buffet Wants His Money to Be Managed When He Dies

The world’s most famous investor reveals his explicit instructions for the money he’s bequeathing in a trust for his wife:

“Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions or individuals—who employ high-fee managers.”

Related: Warren Buffet’s Advice to Get Rich

Addendum (1/10/2016):

Related: Who Routinely Trounces the Stock Market? Try 2 Out of 2,862 Funds

Related: Mutual Funds Enrich the Financial Services Industry at Your Expense

Why You Need a Good Accountant

Looks like the Obamas have a better one than the Bidens. Although the First Family reported income of $481K and the Second Family reported income of $407K, both paid about the same in taxes ($100K).

	The Obamas	The Bidens
Adjusted Gross Income	$481,098	$407,009
Taxes Paid	$98,169	$96,378
Effective Tax Rate	20.4%	23.7%

When It Comes to Money, Which Personality Are You?

Lifehacker:

One person, for example, might think, “I grew up with almost nothing, so I’m going to save as much as possible and never want for money,” while the other person could think “I grew up with almost nothing, so I’m going to enjoy the money I earn now.”

Psychology Today:

1. The Spender (seen unfavorably by their contrary partner as a “spendthrift.” “squanderer,” or “compulsive shopper”). Money is an invaluable commodity. It can be used in a multitude of ways to increase personal welfare, satisfaction, pleasure, excitement, joy, contentment, and so on. Exchanged for the right goods and services—and/or given as gifts—it contributes to one’s security, independence, happiness and well-being. Moreover, it’s a great advantage to have enough money (or credit) such that one doesn’t have to be preoccupied with how much something costs. One can simply buy whatever one most desires, and so derive maximum gratification from it. In short, the value of money emanates precisely from its “spendability.”

2. The Saver (seen unfavorably by their contrary partner as a “cheapskate,” “tightwad,” “hoarder,” or even “miser”). Money is an invaluable commodity. In fact, It’s so valuable that it ought to be cherished, held in the highest esteem—and coveted. For if it’s scrupulously safeguarded, it offers a person a most gratifying sense of accomplishment, stability, power and control. It’s actually best not to spend money at all but to conscientiously invest it—to protect it (or “grow” it) all the more. And because money is so precious, when it’s spent it ought to be done with utmost circumspection. So gratuitous, frivolous, lavish or extravagant purchases cannot be justified—and ought to be rigorously avoided. Additionally, wasteful, self-indulgent expenditures should be kept under strict control. Rather, money needs to be handled “wisely” (i.e., with great discretion and restraint). Moreover, having or achieving considerable wealth hardly constitutes sufficient reason to be profligate about one’s finances. For regardless of material circumstances, money is something to hang on to. In sum (no pun intended), the value of money lies not in spending it, but saving it.

Warren Buffet’s Advice to Get Rich

For all his investing lessons, Mr. Buffett also suggested a very simple strategy for people who do not want to parse balance sheets. When he dies, Mr. Buffett’s cash will be put into a trust for his wife, Astrid Menks. Mr. Buffett said he had advised the trustee to put 10% of that cash into short-term government bonds and 90% into an S&P 500 index fund.

“I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers,” he said.

—The Times