If You Want to Go Broke, Listen to a Billionaire

https://sideprojectplaybook.com/if-you-want-to-go-broke-listen-to-a-billionaire/

134 62 7 years ago

sandwall• 7 years ago

Love this. Reminds me of one of my favorite xkcd's on survivorship bias: https://xkcd.com/1827/

perl4ever6• 7 years ago

The other day, I was asked to graph project completion time against starting year, in the hopes of showing a positive trend.

Well, going from 2017 to 2018 to 2019 seemed to show an obviously improving trend. But then I realized I needed to explain that it's not just a coincidence that 2017 had more projects that took over a year, compared to 2019.

OrgNet2• 7 years ago

If you want to be rich, act like a billionaire (actions speak louder then words).

knicholes• 7 years ago

How do billionaires act? I don't know any personally.

rodgerd• 7 years ago

It's not very useful advice, given that is spans from Elon Musk - who uses a top of the line business jet to commute from one part of the Bay area to another, very eco-conscious, and owns multiple mansions - to Warren Buffet who famously lives in the relatively modest house he purchased decades ago.

OrgNet2• 7 years ago

HNers are so anal, don't you see the correlation with OP's title?

quickthrower2• 7 years ago

Pre money (if applicable): Ruthlessly, I'd imagine.

Post money: Ruthlessly (or they may go all charitable and all that...)

tiborsaas• 7 years ago

I can act like I live a lavish life and all I do is success upon success, but I know exactly that my friends would laugh behind my back.

tunesmith2• 7 years ago

I went down the rabbit hole with the Kelly Criterion recently, last time I thought about venture capitalism. Starting with a scenario of a repeated bet where you have a 10% chance of a 50:1 upside, Kelly says to bet a percentage of your bankroll each time, while someone of a more conservative bent might want to have a 95% chance of not going below a certain drawdown.

With those stats, you have to bet 28-29 times to have a 95% chance of winning your 50x upside. So depending on your maximum drawdown, you have to make a much smaller bet than what Kelly Criterion counsels.

In fact that seems to be a general thing - Kelly Criterion is generally about maximizing geometric returns, but the volatility will kill you - it takes lot of betting to have high odds of being close to those theoretical returns.

I'm not really experienced enough with the math to find strategies that maximize your expected growth when subjected to a certain drawdown restriction, but that's what people need when they are at lower net worth levels.

devoply• 7 years ago

So the Matthew principle strikes again. Rich get richer, poor get poorer.

disjhshava• 7 years ago

The math works out a lot better if your society has a strong social safety net, and friendly bankruptcy and limited liability laws.

tunesmith2• 7 years ago

Man, I have to learn more about that at some point. I own a business but it was never designed to be one that took out a business loan. I never even considered it because I just equated losing it with the awfulness of losing a bunch of personal money. Is there a class one can take that teaches people how to work the bankruptcy/llc system the way it's intended to be worked? Meaning, not abusing it, but being "entrepreneurial" in the way that those laws are apparently supposed to incentivize?

tlb• 7 years ago

The Kelly criterion works for serial bets, but since most startup bets take 10 years to pay off, you can only make a few in series over your lifetime.

You want to have many simultaneous investments. You can model this with Black-Scholes, except you don't know any of the parameters. So in practice, just put x% of your available capital into venture bets and put your energy into picking good startups.

Havoc• 7 years ago

Interestingly enough I see a parallel to this in my family.

I'm the one with the high end financial education so they ask me for advice (fair enough). Yet circumstances differ so it's invariable a case of "do as I say, not as I do". No sister...leveraged derivatives with short DTEs aren't for you.

...weird parallel in a microcosm sense.

H8crilA• 7 years ago

Investing is a "loser's game". By comparing it to tennis: a "winner's game" is a tennis game in which you try to play the ball so well that your opponent can't handle it, and you score a point. This is how professionals play tennis, they win by superior play. An amateur is playing a "loser's game" - focused on just bouncing the ball 20 times and hoping that his opponent bounces the ball only 19 times. Similarly in investing the whole point is to avoid trouble, stay in the game for a long time and maybe eventually score a nice win on the way. This implies insistence on low prices (buy low sell high / margin of safety), not chasing crazy returns (because crazy high returns are often surrounded by crazy bad losses) and diversification (accepting the fact that one's judgement is probably poor and that there is inherent randomness in the world).

edw• 7 years ago

Why people have downvoted you is beyond me. There’s a lot of truth about investing and life in your comment.

dragontamer2• 7 years ago

It should be noted that Stockfish chess heavily prunes its searches because it too plays a "loser's game". Instead of searching for the best move, Stockfish narrows its search and simply tries to prove that the move it does pick "isn't bad".

Ameatur level Chess is about figuring out a good "trick": a powerful pin or maybe a fork that the opponent didn't see. So low-level chess is a "winner's game".

High-level chess, at least computer chess, is more about making fewer mistakes than the opponent.

---------

Bogey Golf is another one. Playing for +18 leads to a score of ~88 after a round of golf, solid for an amateur. Not good enough for the pro-leagues. You get onto the green in 3-shots and only have 2-putts.

Pro-players of course take big, aggressive hits. Tiger Woods in his hayday would get onto the green in just 1-shot (throwing out his back and knee, it certainly wasn't a healthy swing). But a typical player who tried to hit that hard would end up missing their shots, whiffing the ball, or just straight up sending the ball out of bounds.

cjlars• 7 years ago

A common saying in chess is that the winner is the person who made the second to last mistake.

However, having played quite a bit against stockfish it certainly doesn't feel like that. It just crushes you, mercilessly and swiftly no matter what you do.

leetcrew• 7 years ago

plenty of pro tennis players play a highly competent "loser's" game; Rafael Nadal is a good example, along with many other clay court players.

NickNaraghi2• 7 years ago

This article could have just as easily been titled "If You Want to Go For Broke, Listen to a Billionaire"

Not all startups are VC-backable; not all entrepreneurs are trying to build massive companies. Entrepreneurs, as a microcosm of all people, have a wide variety of values and goals.

So when the author says:

A Better Formula For Regular Entrepreneurs

What's "better"? What's a "regular entrepreneur"? More precise language might be something like "A formula with a higher chance of success for entrepreneurs who value a likely moderately-positive outcome over an unlikely massively-positive outcome."

Personally, I'm going for broke. I want to create the largest possible positive impact that I can for humanity. VC incentives to seek unicorns may not be aligned with all entrepreneurs, especially the "regular entrepreneurs" above. But I think for some, the incentives and economics are aligned.

WillPontificate4• 7 years ago

Then that's the right strategy for you. You're intentionally loading all your bets towards a single massive payday.

For someone on Main Street, however, the odds of any payoff are probably more important than the size of the potential payoff.

adventured2• 7 years ago

I've known a lot of Main Street entrepreneurs over the years, small business people of various levels of success. I know far more of those people than I know entrepreneurs that have been VC-backed.

I'm talking about people that own insurance agencies, small city newspapers, boutique shops, fast food franchises, small consulting businesses in tech or elsewhere, car dealerships, convenience stores, bakeries, food shops, and so on.

To add to what the parent, Will, said - very few people in general possess extraordinary skill at anything. That's just reality. It's true of most business creators as well as it is the general population. Most entrepreneurs don't have access to the networks required to raise millions of dollars in venture capital, even if they wanted to. And given the very finite nature of such things (there are only so many VCs and so much money, and relatively few VC deals even in the largest economy that has 330m people), most could never get access to them. The numbers are badly against anyone that wants to attempt it.

You're not building the next giant company without extraordinary skill, most likely. Sure, there are some flukes that get through somehow, mostly that isn't the case however. Mostly, it takes extraordinarily skill at a thing, combined with immense luck, typically immense hard work, immense sacrifice, and access to elite networks. Yes, Joe/Jane Average can beat the odds, overcome everything that is dramatically stacked against them, it happens, and it's kind of like hitting the lottery. More likely they'll ruin their life chasing a nearly impossible dream.

99%+ of the population is eliminated from contention instantly. It's simply not a consideration, it's not a potential, and I believe most of them know it. Certainly all the small business operators I've ever talked to, they tend to understand their capabilities and limits very well, especially those that have been in business a while. They know better than to waste their time on fantasies (and that isn't a bad thing). Very few of them that I know did it to try to get very wealthy, mostly it was for all the other reasons: independence, not having a boss, charting your own course, pursuing a solid opportunity that becomes a good job, doing something they enjoy, etc. The VC game is an entirely different beast, it makes perfect sense that most entrepreneurs would have little interest in it.

NickNaraghi2• 7 years ago

Exactly! I think we agree that there are different "right" strategies based on individuals' circumstances, values and goals. I make no judgements on the strategies (or values and goals) that people choose to adopt.

However, generalizing that there's a "right" strategy for "regular entrepreneurs" is where I think the author gets into trouble. And I think more specific language would help.

zelon884• 7 years ago

Great read! Lots of potent talking points for your next financial meeting at work.

I saw a company advisor get all bent because so many people were taking out 401k loans. So we had to listen to him (a millionaire) and the CEO (also a millionaire) talk about how "cheap" money is at the moment and how they're both taking out mortgages and investing the money because their mortgage rates are so low. Then my boss said, verbatim, "I know, for a fact, with what you're making that any of you could get a loan at a credit union right now."

There's a lot of older people in my industry who take an executives word for gospel. It was heartbreaking to see this man gaslight everybody with his unwitting ignorance to how real people get by.

perl4ever6• 7 years ago

Do you in fact know anyone who has taken a 401k loan?

Right now, I can't get a mortgage loan from a bank, but then again, I don't have a 401k either. I'm not sure of what scenario would make me do it if I did have a 401k.

zelon884• 7 years ago

There was one guy who shared his experience. He said he has high risk investments and was worried about the market. When things stabilized he put the money back.

Another shared that he used it for home repair. Another bought a car.

The downside seem to be 1) high fees 2) that money isn't making interest 3) you wind up paying tax on it when you pay the loan back with your regular pay.

cannonedhamster• 7 years ago

We did. It was the lowest cost loan we could get and the original value kept growing. It was basically just like getting a loan from the company in our case at zero percent interest. Not sure everyone gets those same benefits.

isoskeles3• 7 years ago

401k loans are not a great idea in general. Are you saying that only "real" people take out 401k and other creative types of loans and only not "real" people (millionaires? I guess?) can qualify for better loans? I'm not sure I understand.

zelon884• 7 years ago

No, I'm saying it's apples and oranges for a CEO and financial planner to group employees together who make 10% as much just to beam about how cheap financing is and how anyone with half a mind is going to keep their mortgage because the market for money is so cheap blah blah blah.

We make 10% of this guy's salary. Comparing his apple to our orange is going to disenfranchise people.

joncrane2• 7 years ago

Can't you do it once for home purchase? You basically borrow from yourself in order to buy a house? Instead of paying a mortgage, you slowly redeposit the money back into your 401(k).

sixtypoundhound• 7 years ago

Dear God, please tell me that wasn't for company stock...

So if the shit hits the fan, you'll get canned AND wipe your savings out at the very moment you need it most... Never leverage up to buy equity in a business you don't control.

When things turn, they turn fast.

Source: My last company is basically going out of business.

streetcat1• 7 years ago

So is there a concerte example where a big competitior "crushed" a smaller one?

I can give plenty for which a small competitior crashed a big one.

softfalcon• 7 years ago

Facebook eating up Instagram and WhatsApp is one.

Also Amazon as it keeps eating up industries.

Wal-mart and its national take over resulting in the loss of multiple local retailers.

EA, Activision, Ubisoft and their all out consumption of almost every successful smaller game studio in the last couple decades.

Seems to be quite a few just off the top of my head. Take your pick, I'm sure you can Google and find even more.

mdorazio2• 7 years ago

Microsoft > Netscape

Facebook > Snap

Luxxotica > Basically every glasses competitor

justinclift• 7 years ago

https://en.wikipedia.org/wiki/Stac_Electronics#Microsoft_law...

https://en.wikipedia.org/wiki/Advanced_Micro_Devices,_Inc._v....

Also, see Amazon vs any of the 3rd party Amazon Marketplace sellers subsequently displaced using the various Amazon home brands.

mdorazio2• 7 years ago

I think it's worth discussing things that actually lead to positive outcomes in business settings rather than looking at outliers who mostly got lucky. People I know in the "successful entrepreneurs despite never getting lucky" category generally have some combination of attributes that the whole VC industry (including wishful founders) often downplays:

- Actual domain expertise (a summer internship or talking to a few people doesn't count)

- A solid grasp on business fundamentals and managing teams effectively

- A strong network of people who serve as potential employees, partners, customers, mentors, etc. due to being outgoing and generally spending time on developing relationships

- An uncanny ability to recognize niche business problems that are underserved by existing options

- A willingness to laugh at concepts like "work-life balance", "happy marriage", and "spend more time with your kids"

- The ability to build a strong team from nothing and keep it strong by firing people who suck and rewarding people who are good

- Recognition of what you are and are not good at, and then finding good people to do the latter for you

- The ability to sell things effectively (no, if you build it they probably won't just come)

I'm sure others on HN have their own lists.

WillPontificate4• 7 years ago

Yes and no.

I agree with everything except #5. My marriage & kids are irreplaceable.

So if you have everything else, which is a more rational bet:

- Investing in a low probability, massive payoff

- Investing in a lower (yet still high) payoff with less variation in expected outcome.

There are huge segments of the economy where you can buy a small business for at a 3 - 6 multiple of annual earnings. Many companies in this space are unsophisticated, so there is massive potential for operational improvement as well (introducing basic process, tech, and marketing strategies).

hogFeast• 7 years ago

Why do you need to categorise this? It seems so utterly futile: "Oh, just do these ten things, and you will become a billionaire...all you need to know is the secret knowledge that only billionaires know".

Do something you enjoy. Stop trying to study the success of other people and reverse engineer it. Not for anything else: you can be sure that they spent more time just doing the thing they wanted to do rather than study other people for tips.

I do get this feeling. I went through it. But then I realised that none of the stuff that matters to me is going to change. If you want to be able to jump into a big pool of gold coins like Scrooge McDuck...then maybe.

Also, if you are really interested in business the absolute last thing you should be doing is building lists of personal characteristics. Read what public companies are doing, read financial reports, etc. That is actual business (I don't think the OP is interested in business, he just wants success...which is something else...go into politics maybe?).

perl4ever6• 7 years ago

"Oh, just do these ten things, and you will become a billionaire"

I think you're completely misconstruing what you responded to. That list is neither about becoming a billionaire nor about what to do to get there. It's describing talents or tendencies that make people build things worth millions, not billions.

anon90012• 7 years ago

Personally, I'd like to take any path that ends with a Scrooge McDuck pool.

georgewsinger• 7 years ago

If we don't have technologists going for historical wins (or 10,000x returns, in VC speak), then our society will forever stagnate.

Lifestyle businesses won't drive the developed world into 10%+ GDP annual growth. But a few moonshots succeeding might actually be able to do that.

I'll keep listening to the billionaires, thank you very much. Am 100% willing to go bust (we're all going bust in the long-run).

refurb• 7 years ago

My current role has me interacting on a regular basis with the CEO and several VPs of a Fortune 500 company.

Now, don’t get me wrong, each of them have definite skill sets, but when it comes to business strategy, they’re just guessing like the rest of us. Of course their guesses are more informed than mine, but they are still guesses.

What I’ve noticed makes for a very effective senior leader is the ability to ask the right questions - they may have little to know domain knowledge, but they still have a good ability to smoke out a bullshit story.

euske• 7 years ago

While I'm no investor or anything, there's one life-y takeaway from this article: diversify your areas of interests. Take as many bets as possible. I've always been working on it.

RickJWagner• 7 years ago

Ah. This is about entrepreneurs, not average people.

To become rich (not broke), listen instead to billionaires like Warren Buffett or millionaires like Jack Bogle. They both offer plans for average people to become wealthy. (With very high probabilities of happening. But it takes decades.)

See Bogleheads.org for details.

If You Want to Go Broke, Listen to a Billionaire

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