BookYol

Concept

Getting Wealthy vs. Staying Wealthy

Getting wealthy vs. staying wealthy is Morgan Housel's distinction between two opposite skills: getting money takes optimism and the nerve to take risks, while keeping it takes frugality, humility and a kind of paranoia about whatever could knock you out of the game.

Housel observes in The Psychology of Money that many people who become rich do not stay rich, because the traits that build a fortune work against keeping it. The optimism and boldness that win on the way up turn, near the top, into bigger bets, borrowed money and the belief that a good run will never end. His example is Jesse Livermore, one of the most celebrated traders of his era, who made a fortune during the 1929 crash and lost it within a few years through ever larger bets. Staying wealthy rests on survival: compounding cannot work for someone who has been forced out, so the first goal is never to be wiped out. Two rules follow. First, plan on the plan not going according to plan, so that a job loss, a bad decade or a family emergency is absorbed rather than fatal. Second, hold two attitudes at once: optimism about the long run, and paranoia about the short-run events that could stop you from reaching it. They feel contradictory. Together they are what keeps a person in the game long enough for time to do its work.

A real-life example

Hakan runs a textile workshop in Gaziantep and grew it fast in the good years, each time with a larger loan. When a big foreign order was cancelled, the instalments kept coming and he had to sell two machines below their value. Rebuilding, he changed the rule rather than the ambition: he now grows only with cash already earned and keeps six months of costs, about 900,000 lira, untouched. Growth is slower. A single cancelled order can no longer end the business.

How to use it

  1. 1Write down the one event that could force you out of the game, such as losing your income or a debt you could not pay, and build a defence against it first.
  2. 2Plan as if the plan will not go to plan: assume lower income, higher costs and a longer wait than you expect.
  3. 3Before any bigger bet, ask whether you could survive it going badly wrong; if not, make it smaller.