The Psychology of Money Chapter 5: Getting Wealthy vs. Staying Wealthy

Jesse Livermore and Abraham Germansky were two individuals involved in the markets during the Great Depression. Both were very good, meaning they had both found legitimate ways to make millions of dollars by an early age. During the violent market crash in October 1929, Livermore was “short” the market. Without a longer explanation, this means he made money if the market went down in value. In a single day, he made the equivalent of $3 billion in today’s dollars. Germansky, on the other hand, was not “short”, but “long”, meaning he had bet nearly everything he had that markets would continue to roar. When they crashed, so did he. That same week that made Livermore wealthier than his wildest dreams, Germansky disappeared. His wife put a notice out in the papers to get help finding him, and after an investigation, all signs pointing to him taking his own life.

But how did Livermore respond to his unparalleled wealth increase? He continued his market involvement, justifying riskier and riskier investments. After all, if you have $3 billion, what difference would it make if you lost $1b and only had $2b left? Four years after that fateful week in October 1929, Livermore, like Germansky before him, lost everything, and disappeared. His wife also put out a notice in the paper to get help finding her lost husband. While Livermore did eventually appear, he also ended up taking his own life.

Nobody reading this would choose to have Livermore or Germansky’s wealth if it resulted in their same ending. While extreme examples, these stories show that “getting money and keeping money are two different skills. Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast.” Housel says that keeping wealth, regardless of how large or small, requires a survival mindset. He gives three universal applications of how to practice this survival mindset

1. More than wanting big returns, we should want to be financially unbreakable. If you can survive the crashes like October 1929, you can stick around long enough for the miracle of compounding growth (see chapter 4).

2. We need to know that while planning is important, the most important part of every plan, is to plan on the plan not going according to plan.

3. We should strive for a barbelled personality–optimistic about the future, but paranoid about what will prevent us from getting there.

As financial planners, our job is to understand what you want, and what will stop you from getting that – if we let it. Believe it or not, having conversations about premature death, disease, accidents, bad markets, high inflation, etc. isn’t the highlight of our work. What is, is making you financially unbreakable – seeing nothing be able to get in the way of your dreams. So next time you’re in, we might ask to make a plan for an unlikely tragedy, but only so that we can help you live without ever having to worry about it.

Until next time, happy reading!