Most Effective Way to Stay Trapped in a Paycheck to Paycheck Lifestyle
Do you want to destroy your wealth? Spend your life in poverty? Here are some ways to do it..Gary Waters / Ikon.
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Famed investor and businessman Charlie Munger has said
one of the best ways to study how to accomplish something is
to invert it and look at what not to do. In that spirit, here are
seven things you can do to destroy your wealth and guarantee
you spend your life in much less affluence than you would
have enjoyed.
1. Trade as Frequently as Possible
One of the surest ways to squander your wealth is to spend
the maximum amount possible on commissions, fees, spreads,
and other expenses.
Each time you buy or sell shares of a stock, you are going to
incur some combination of these and it doesn’t take much to
do real damage. If you were to pay $10 commissions on buy
and sell orders, and bought and sold stocks once a week, your
commissions alone would come to $1,040. Even on a portfolio
of $100,000, that’s going to seriously dent your results over
time. For more information, read Frictional Expenss – The
Hidden Investment Tax.
The damage is compounded if you hold assets through a
broker, bank, trust, or wealth management department that
charges you a fixed percentage of your assets, often 1%, each
year. Add to the top of that the fees you pay on your mutual
funds and don’t know it, or sales charges on funds that have
loads and you have succeeded in actually costing yourself
money each year. Don’t believe it can happen? I know first
hand of one of the world’s most celebrated wealth
management companies that charges clients roughly 1.00% of
assets each year, and then parks a great deal of the money
into S&P 500 index funds with expense ratios of 1.00% to
1.25% (compared to less than 0.10% for an industry leader
such as Vanguard).
To even earn a decent return, you’d have to overcome not
only dividend and capital gains taxes, but also the 2.00% to
2.25% fees that hit you up from the very first moment you
open an account. If they were to arrange a stake in a hedge
fund, many of which charge a so-called 2 and 20
arrangement whereby the client pays 2% of assets per
annum plus 20% of profits, and it’s going to be almost
entirely mathematically impossible for the investor to beat
the broader stock market.
It is a mystery to me why the financial press has lauded this
company as serving its clients well.
2. Build a Portfolio of Companies With P/E Ratios at Least 3x as High
as the S&P 500
To really destroy your wealth, you need to overpay for
everything. That means buying the most expensive stocks, at
the highest possible prices as measured by the p / e ratio,
without any real hope of achieving an earnings yield in
excess of the long-term rate of return on U.S. Government
bonds. It’s not all bad, though, because you’ll have the
temporary enjoyment of owning the incredibly “sexy” stocks
that are spoken about constantly by Wall Street and those
attending cocktail parties.
3. Put Together Assets With Tons of Correlated Risk
Another great way to hurt yourself and your hopes of
financial independence is to build a collection of stocks and
other assets that you have convinced yourself is diversified
but, in fact, has correlated risk running throughout. Think of
someone who has a portfolio made up of a dozen companies
—McDonald’s, Wendy’s, Starbucks, IHOP, Yum, Sonic, Ruby
Tuesday, Burger King, Panera Bread, California Pizza
Kitchen, Chipotle Mexican Grill, and PF Chang.
Then, brag to all your friends about how you own enough
stocks that even the Great Depression couldn’t take you
under.
Obviously, in this case, a rise in commodity prices alone
could crush the profits of your holdings. Another example
would be someone who has a portfolio filled with stocks of
banks and insurance companies—or Internet businesses.
4. Only Buy Stocks You Don’t Understand
Who needs to listen to folks like Warren Buffett as they
constantly espouse the virtues of staying within your circle of
competence? If your broker or friends say that a stock is
going up and you are dedicated to losing your proverbial
shorts, buy it. After all, statistically they have a shot at being
right one of the many times they throw the dice. It would be
downright stupid to buy companies that make boring
products like coffee, sealing gaskets, and office supplies when
you can buy military grade satellite technology firms with
factories in countries that you honestly didn’t even realize
existed.
5. Buy Shares With High Accruals—and Lots of Stock Options
When analysts talk about the so-called quality of earnings,
they often recommend investors buy shares of companies
where the cash flows don’t differ substantially from the
reported net income. In these businesses, they may argue,
profits come in the form of cold, hard cash. Pshaw! Who
needs that? For real wealth destruction, buy only companies
where the net income figures diverge wildly from the
statement of cash flows. Better yet, look for management with
shady reputations and who constantly tweak the rate of
depreciation or pension plan assumptions to manage
reported results. For the perfect icing on the cake, make sure
they are compensated entirely in low-cost stock options and
maintain very little ownership in the firm.
6. Pay the Maximum Taxes and Penalties Possible
Nothing can condemn you to poverty faster than massive
taxes and Government-imposed penalties. The quickest way
to bring these on yourself is to get backed into a fiscal corner
so you have to tap your 401 k or Traditional IRA, paying the
income taxes that would have been due in the first place, plus
an additional 10% penalty on top of that. This method is
particularly effective for wealth destruction because you
could decimate a six or seven figure portfolio in a matter of
seconds simply by authorizing the withdrawal.
7. Maximize Non-Deductible Debt
The worst kind of debt—or if you’re into wealth destruction,
one might say the best kind—is that which is not tax-
deductible and carries an enormously high interest rate.
Chief among these is credit card debt, which can routinely
run as high as twenty or thirty percent. If you really want to
wipe out your assets, there’s no better way to do it than to
ring up the balances on those plastic cards, especially with
items that quickly depreciate such as cheap furniture and
electronics.
